UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10‑Q10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number 001‑38066001-38066
SELECT ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
| |
Delaware |
|
(State of incorporation) | (IRS Employer Identification Number) |
| |
Houston, TX |
|
(Address of principal executive offices) | (Zip Code) |
(940) 668‑0259(713) 235-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A common stock, par value $0.01 per share | WTTR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act.
| | | |
Large accelerated filer ☐ | Accelerated filer | Non-accelerated filer | Smaller reporting company ☐ |
| |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑
As of November 8, 2017,August 1, 2022, the registrant had 59,201,39398,114,103 shares of Class A common stock 6,731,845 shares of Class A-2 common stock and 40,331,98916,221,101 shares of Class B common stock outstanding.
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10‑Q10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our final prospectus dated April 20, 2017most recent Annual Report on Form 10-K, in our subsequently filed Quarterly Reports on Form 10-Q, under the heading “Part II—Item 1A. Risk Factors” in this Quarterly Report and filedthose set forth from time to time in our other filings with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act, on April 24, 2017 (the “Final Prospectus”“SEC”) and under the heading “Item 1A. Risk Factors” in this Quarterly Report.. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
| the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, and associated repercussions to supply and demand for oil and natural gas and the economy generally; |
● | global economic distress resulting from sustained Russia-Ukraine war and related economic sanctions, which may decrease demand for oil and demand for our services or contribute to volatility in the prices for oil and natural gas; |
● | actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “OPEC+”) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with announced supply limitations; |
● | actions taken by the Biden Administration or state governments, such as executive orders or new or expanded regulations, that may negatively impact the future production of oil and natural gas in the United States (“U.S.”) or our customers’ access to federal and state lands for oil and gas development operations, thereby reducing demand for our services in the affected areas; |
● | the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies; |
● | the level of capital spending and access to capital markets by |
● | the ability to source certain raw materials and other critical components or manufactured products globally on a timely basis from economically advantaged sources; |
● | operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, measures taken to protect the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; |
3
| any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, which if enacted, could reduce labor availability or add additional operational costs as we may experience constraints on our workforce and the workforce of our supply chain, which could have a negative impact on our operations; |
● | the degree to which consolidation among our customers may affect spending on U.S. drilling and completions; |
● | trends and volatility in oil and gas |
|
|
| regional impacts to our business, including our key infrastructure assets within the |
| capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a decrease in the demand for our services in our core markets; |
● | regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our |
● | growing demand for electric vehicles that may result in reduced demand for gasoline and therefore the demand for our services; |
● | our ability to |
| our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms; |
| our health, safety and environmental performance; |
| the impact |
|
|
|
|
| the degree to which our exploration and production (“E&P”) customers may elect to operate their water-management services in-house rather than source these services from companies like us; |
● | our level of indebtedness and our ability to |
|
|
| delays or restrictions in obtaining permits by us or our customers; |
3
| constraints in supply or availability of equipment used in our business; |
● | the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis; |
4 |
|
|
| changes in global political or economic conditions, generally, and in the markets we |
| acts of terrorism, war or political or civil unrest in the U.S. or elsewhere; |
● | accidents, weather, |
| the other risks |
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under “Riskthe heading “Part I―Item 1A. Risk Factors” in the Final Prospectusour most recent Annual Report on Form 10-K and under the heading “Item“Part II―Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, and this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.note.
45
PART I – FINANCIAL INFORMATION
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||
|
| (unaudited) |
|
|
| |
Assets |
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 42,393 |
| $ | 40,041 |
Accounts receivable trade, net of allowance for doubtful accounts of $2,867 and $2,144, respectively |
|
| 148,372 |
|
| 75,892 |
Accounts receivable, related parties |
|
| 433 |
|
| 135 |
Inventories |
|
| 852 |
|
| 1,001 |
Prepaid expenses and other current assets |
|
| 13,495 |
|
| 7,586 |
Total current assets |
|
| 205,545 |
|
| 124,655 |
Property and equipment |
|
| 815,002 |
|
| 739,386 |
Accumulated depreciation |
|
| (535,456) |
|
| (490,519) |
Property and equipment, net |
|
| 279,546 |
|
| 248,867 |
Goodwill |
|
| 25,091 |
|
| 12,242 |
Other intangible assets, net |
|
| 35,351 |
|
| 11,586 |
Other assets |
|
| 7,216 |
|
| 7,716 |
Total assets |
| $ | 552,749 |
| $ | 405,066 |
Liabilities and Equity |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Accounts payable |
| $ | 11,751 |
| $ | 10,796 |
Accounts payable and accrued expenses, related parties |
|
| 1,246 |
|
| 648 |
Accrued salaries and benefits |
|
| 8,595 |
|
| 2,511 |
Accrued insurance |
|
| 11,008 |
|
| 10,338 |
Accrued expenses and other current liabilities |
|
| 39,713 |
|
| 22,091 |
Total current liabilities |
|
| 72,313 |
|
| 46,384 |
Accrued lease obligations |
|
| 18,100 |
|
| 15,946 |
Other long term liabilities |
|
| 8,008 |
|
| 8,028 |
Long-term debt, net of current maturities |
|
| — |
|
| — |
Total liabilities |
|
| 98,421 |
|
| 70,358 |
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
Class A-1 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017; 16,100,000 shares issued and outstanding as of December 31, 2016 |
|
| — |
|
| 161 |
Class A common stock, $0.01 par value; 250,000,000 shares authorized and 30,468,249 shares issued and outstanding as of September 30, 2017; 3,802,972 shares issued and outstanding as of December 31, 2016 |
|
| 305 |
|
| 38 |
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 38,462,541 shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
|
| 385 |
|
| 385 |
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
|
| — |
|
| — |
Additional paid-in capital |
|
| 206,158 |
|
| 113,175 |
Accumulated deficit |
|
| (8,207) |
|
| (1,043) |
Total stockholders’ equity |
|
| 198,641 |
|
| 112,716 |
Noncontrolling interests |
|
| 255,687 |
|
| 221,992 |
Total equity |
|
| 454,328 |
|
| 334,708 |
Total liabilities and equity |
| $ | 552,749 |
| $ | 405,066 |
| | | | | | |
| | June 30, 2022 | | December 31, 2021 | ||
|
| (unaudited) |
| | ||
Assets | | | | | | |
Current assets |
| | | | | |
Cash and cash equivalents | | $ | 25,742 | | $ | 85,801 |
Accounts receivable trade, net of allowance for credit losses of $5,687 and $4,401, respectively | |
| 338,865 | |
| 232,824 |
Accounts receivable, related parties | |
| 382 | |
| 219 |
Inventories | |
| 39,389 | |
| 44,456 |
Prepaid expenses and other current assets | |
| 32,724 | |
| 31,486 |
Total current assets | |
| 437,102 | |
| 394,786 |
Property and equipment | |
| 1,013,230 | |
| 943,515 |
Accumulated depreciation | |
| (574,348) | |
| (551,727) |
Total property and equipment, net | |
| 438,882 | |
| 391,788 |
Right-of-use assets, net | | | 51,245 | | | 47,732 |
Other intangible assets, net | |
| 103,032 | |
| 108,472 |
Other long-term assets, net | |
| 13,567 | |
| 7,414 |
Total assets | | $ | 1,043,828 | | $ | 950,192 |
Liabilities and Equity | |
| | |
|
|
Current liabilities | |
| | |
|
|
Accounts payable | | $ | 53,986 | | $ | 36,049 |
Accrued accounts payable | | | 71,270 | | | 52,051 |
Accounts payable and accrued expenses, related parties | |
| 2,793 | |
| 1,939 |
Accrued salaries and benefits | |
| 23,485 | |
| 22,233 |
Accrued insurance | |
| 15,335 | |
| 13,408 |
Sales tax payable | | | 2,408 | | | 2,706 |
Accrued expenses and other current liabilities | |
| 19,121 | |
| 19,544 |
Current operating lease liabilities | | | 17,573 | | | 13,997 |
Current portion of finance lease obligations | |
| 19 | |
| 113 |
Total current liabilities | |
| 205,990 | |
| 162,040 |
Long-term operating lease liabilities | |
| 51,597 | |
| 53,198 |
Other long-term liabilities | |
| 45,096 | |
| 39,780 |
Total liabilities | |
| 302,683 | |
| 255,018 |
Commitments and contingencies (Note 9) | |
| | |
|
|
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 98,160,573 shares issued and outstanding as of June 30, 2022; 350,000,000 shares authorized and 94,172,920 shares issued and outstanding as of December 31, 2021 | |
| 982 | |
| 942 |
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; 0 shares issued or outstanding as of June 30, 2022 and December 31, 2021 | |
| — | |
| — |
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of June 30, 2022 and December 31, 2021 | |
| 162 | |
| 162 |
Preferred stock, $0.01 par value; 50,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021 | |
| — | |
| — |
Additional paid-in capital | |
| 974,066 | |
| 950,464 |
Accumulated deficit | |
| (340,167) | |
| (359,472) |
Total stockholders’ equity | |
| 635,043 | |
| 592,096 |
Noncontrolling interests | |
| 106,102 | |
| 103,078 |
Total equity | |
| 741,145 | |
| 695,174 |
Total liabilities and equity | | $ | 1,043,828 | | $ | 950,192 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
56
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
| $ | 125,086 |
| $ | 60,975 |
| $ | 311,275 |
| $ | 173,157 |
|
Accommodations and rentals |
|
| 15,615 |
|
| 5,838 |
|
| 38,457 |
|
| 19,585 |
|
Wellsite completion and construction services |
|
| 13,179 |
|
| 7,094 |
|
| 38,522 |
|
| 22,923 |
|
Total revenue |
|
| 153,880 |
|
| 73,907 |
|
| 388,254 |
|
| 215,665 |
|
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Water solutions |
|
| 88,087 |
|
| 49,996 |
|
| 226,737 |
|
| 144,653 |
|
Accommodations and rentals |
|
| 11,976 |
|
| 4,969 |
|
| 30,697 |
|
| 15,527 |
|
Wellsite completion and construction services |
|
| 10,888 |
|
| 6,299 |
|
| 32,155 |
|
| 19,817 |
|
Depreciation and amortization |
|
| 23,420 |
|
| 21,613 |
|
| 67,144 |
|
| 73,874 |
|
Total costs of revenue |
|
| 134,371 |
|
| 82,877 |
|
| 356,733 |
|
| 253,871 |
|
Gross profit (loss) |
|
| 19,509 |
|
| (8,970) |
|
| 31,521 |
|
| (38,206) |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 16,087 |
|
| 8,764 |
|
| 49,298 |
|
| 25,928 |
|
Depreciation and amortization |
|
| 375 |
|
| 363 |
|
| 1,312 |
|
| 1,644 |
|
Impairment of goodwill and other intangible assets |
|
| — |
|
| — |
|
| — |
|
| 138,666 |
|
Impairment of property and equipment |
|
| — |
|
| — |
|
| — |
|
| 60,026 |
|
Lease abandonment costs |
|
| 590 |
|
| 13,169 |
|
| 2,871 |
|
| 13,169 |
|
Total operating expenses |
|
| 17,052 |
|
| 22,296 |
|
| 53,481 |
|
| 239,433 |
|
Income (loss) from operations |
|
| 2,457 |
|
| (31,266) |
|
| (21,960) |
|
| (277,639) |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (484) |
|
| (4,343) |
|
| (1,885) |
|
| (11,792) |
|
Other income, net |
|
| 326 |
|
| 431 |
|
| 3,342 |
|
| 588 |
|
Income (loss) before tax expense |
|
| 2,299 |
|
| (35,178) |
|
| (20,503) |
|
| (288,843) |
|
Tax benefit (expense) |
|
| 294 |
|
| (26) |
|
| 326 |
|
| (392) |
|
Net income (loss) |
|
| 2,593 |
|
| (35,204) |
|
| (20,177) |
|
| (289,235) |
|
Less: Net loss attributable to Predecessor |
|
| — |
|
| 34,931 |
|
| — |
|
| 285,359 |
|
Less: Net (income) loss attributable to noncontrolling interests |
|
| (1,369) |
|
| 273 |
|
| 13,013 |
|
| 3,876 |
|
Net income (loss) attributable to Select Energy Services, Inc. |
| $ | 1,224 |
| $ | — |
| $ | (7,164) |
| $ | — |
|
Allocation of net income (loss) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1 stockholders |
| $ | — |
|
|
|
| $ | (2,679) |
|
|
|
|
Class A stockholders |
|
| 1,224 |
|
|
|
|
| (4,485) |
|
|
|
|
Class B stockholders |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
| $ | 1,224 |
|
|
|
| $ | (7,164) |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Basic |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A—Basic |
|
| 30,336,923 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B—Basic |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Basic |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A—Basic |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B—Basic |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Diluted |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A—Diluted |
|
| 30,357,572 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B—Diluted |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1—Diluted |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A—Diluted |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B—Diluted |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenue |
| |
|
| |
| | | | | | |
Water Services | | $ | 195,996 | | $ | 76,651 | | $ | 359,602 | | $ | 140,874 |
Water Infrastructure | | | 60,284 | | | 33,326 | | | 118,838 | | | 71,129 |
Oilfield Chemicals | |
| 79,623 | |
| 51,140 | | | 152,232 | | | 92,856 |
Total revenue | |
| 335,903 | |
| 161,117 | | | 630,672 | | | 304,859 |
Costs of revenue | |
|
| |
|
| | | | | | |
Water Services | | | 158,060 | | | 70,745 | | | 295,106 | | | 133,069 |
Water Infrastructure | | | 44,939 | | | 26,237 | | | 89,317 | | | 52,636 |
Oilfield Chemicals | |
| 67,988 | | | 44,754 | | | 130,151 | | | 82,520 |
Other | |
| 1 | | | — | | | 1 | | | — |
Depreciation and amortization | |
| 29,253 | | | 21,018 | | | 55,753 | | | 42,668 |
Total costs of revenue | |
| 300,241 | |
| 162,754 | | | 570,328 | | | 310,893 |
Gross profit (loss) | |
| 35,662 | |
| (1,637) | | | 60,344 | | | (6,034) |
Operating expenses | |
|
| |
|
| | | | | | |
Selling, general and administrative | |
| 26,695 | | | 15,890 | | | 55,010 | | | 35,784 |
Depreciation and amortization | |
| 526 | | | 624 | | | 1,093 | | | 1,273 |
Lease abandonment costs | |
| 162 | | | 222 | | | 253 | | | 326 |
Total operating expenses | |
| 27,383 | |
| 16,736 | | | 56,356 | | | 37,383 |
Income (loss) from operations | |
| 8,279 | |
| (18,373) | | | 3,988 | | | (43,417) |
Other income (expense) | |
|
| |
|
| | | | | | |
Gain (loss) on sales of property and equipment and divestitures, net | | | 731 | | | (1,657) | | | 2,384 | | | (2,236) |
Interest expense, net | |
| (494) | | | (400) | | | (1,214) | | | (835) |
Foreign currency (loss) gain, net | | | (6) | | | 4 | | | (3) | | | 7 |
Bargain purchase gain | | | 5,607 | | | — | | | 17,041 | | | — |
Other | |
| 875 | | | 895 | | | 1,124 | | | (734) |
Income (loss) before income tax (expense) benefit | |
| 14,992 | |
| (19,531) | | | 23,320 | | | (47,215) |
Income tax (expense) benefit | |
| (182) | | | (84) | | | (396) | | | 179 |
Equity in losses of unconsolidated entities | | | (229) | | | — | | | (358) | | | — |
Net income (loss) | |
| 14,581 | |
| (19,615) | | | 22,566 | | | (47,036) |
Less: net (income) loss attributable to noncontrolling interests | |
| (2,078) | | | 3,048 | | | (3,261) | | | 7,362 |
Net income (loss) attributable to Select Energy Services, Inc. | | $ | 12,503 | | $ | (16,567) | | $ | 19,305 | | $ | (39,674) |
| | | | | | | | | | | | |
Net income (loss) per share attributable to common stockholders (Note 15): | | | | |
| | | | | | | |
Class A—Basic | | $ | 0.13 | | $ | (0.19) | | $ | 0.21 | | $ | (0.47) |
Class B—Basic | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | |
Net income (loss) per share attributable to common stockholders (Note 15): | | | | |
| | | | | | | |
Class A—Diluted | | $ | 0.13 | | $ | (0.19) | | $ | 0.20 | | $ | (0.47) |
Class B—Diluted | | $ | — | | $ | — | | $ | — | | $ | — |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
67
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | (20,177) |
| $ | (289,235) |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding loss arising during period |
|
| — |
|
| — |
|
| — |
|
| (106) |
|
Net amount reclassified to earnings |
|
| — |
|
| — |
|
| — |
|
| 113 |
|
Net change in unrealized gain |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
Comprehensive income (loss) |
|
| 2,593 |
|
| (35,204) |
|
| (20,177) |
|
| (289,228) |
|
Less: Comprehensive loss attributable to Predecessor |
|
| — |
|
| 34,931 |
|
| — |
|
| 285,352 |
|
Less: Comprehensive (income) loss attributable to noncontrolling interests |
|
| (1,369) |
|
| 273 |
|
| 13,013 |
|
| 3,876 |
|
Comprehensive income (loss) attributable to Select Energy Services, Inc. |
| $ | 1,224 |
| $ | — |
| $ | (7,164) |
| $ | — |
|
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income (loss) | | $ | 14,581 | | $ | (19,615) | | $ | 22,566 | | $ | (47,036) |
Comprehensive income (loss) | |
| 14,581 | |
| (19,615) | | | 22,566 | | | (47,036) |
Less: comprehensive (income) loss attributable to noncontrolling interests | |
| (2,078) | |
| 3,048 | | | (3,261) | | | 7,362 |
Comprehensive income (loss) attributable to Select Energy Services, Inc. | | $ | 12,503 | | $ | (16,567) | | $ | 19,305 | | $ | (39,674) |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
78
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)For the six months ended June 30, 2022 and 2021
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Class A-1 |
| Class A |
| Class B |
| Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Stockholders |
| Stockholders |
| Stockholders |
| Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
| Class A-1 |
|
|
| Class A |
|
|
| Class B |
|
|
|
|
|
| Additional |
|
|
|
| Total |
|
|
|
|
|
| |||||
|
|
|
| Common |
|
|
| Common |
|
|
| Common |
|
|
| Preferred |
| Paid-In |
| Accumulated |
| Stockholders’ |
| Noncontrolling |
|
|
| ||||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | |||||||||
Balance as of December 31, 2016 |
| 16,100,000 |
| $ | 161 |
| 3,802,972 |
| $ | 38 |
| 38,462,541 |
| $ | 385 |
| — |
| $ | — |
| $ | 113,175 |
| $ | (1,043) |
| $ | 112,716 |
| $ | 221,992 |
| $ | 334,708 |
Conversion of Class A-1 to Class A |
| (16,100,000) |
|
| (161) |
| 16,100,000 |
|
| 161 |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Issuance of shares for acquisitions |
| — |
|
| — |
| 560,277 |
|
| 6 |
| — |
|
| — |
| — |
|
| — |
|
| 4,360 |
|
| — |
|
| 4,366 |
|
| 5,514 |
|
| 9,880 |
Issuance of shares for initial public offering |
| — |
|
| — |
| 10,005,000 |
|
| 100 |
| — |
|
| — |
| — |
|
| — |
|
| 87,835 |
|
| — |
|
| 87,935 |
|
| 40,569 |
|
| 128,504 |
Equity-based compensation |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 788 |
|
| — |
|
| 788 |
|
| 993 |
|
| 1,781 |
Noncontrolling interest in subsidiary |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (368) |
|
| (368) |
Net loss |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (7,164) |
|
| (7,164) |
|
| (13,013) |
|
| (20,177) |
Balance as of September 30, 2017 |
| — |
| $ | — |
| 30,468,249 |
| $ | 305 |
| 38,462,541 |
| $ | 385 |
| — |
| $ | — |
| $ | 206,158 |
| $ | (8,207) |
| $ | 198,641 |
| $ | 255,687 |
| $ | 454,328 |
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | ||||||
| | Stockholders | | Stockholders | | | | | | | | | | | | | | | |||||||
| | | | Class A | | | | Class B | | Additional | | | | Total | | | | | | | |||||
| | | | Common | | | | Common | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | | | ||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | |||||||
Balance as of December 31, 2021 |
| 94,172,920 | | $ | 942 |
| 16,221,101 | | $ | 162 |
| $ | 950,464 | | $ | (359,472) | | $ | 592,096 | | $ | 103,078 | | $ | 695,174 |
ESPP shares issued | | 3,140 | | | — |
| — | | | — |
| | 24 | | | — | | | 24 | | | 1 | | | 25 |
Equity-based compensation | | — | | | — |
| — | | | — |
| | 6,189 | | | — | | | 6,189 | | | 1,030 | | | 7,219 |
Issuance of restricted shares |
| 2,529,231 | | | 25 |
| — | | | — |
| | 2,220 | | | — | | | 2,245 | | | (2,245) | | | — |
Stock options exercised |
| 70,000 | | | 1 |
| — | | | — |
| | 583 | | | — | | | 584 | | | 24 | | | 608 |
Issuance of shares for acquisitions | | 4,203,323 | | | 42 |
| — | | | — |
| | 34,456 | | | — | | | 34,498 | | | 1,356 | | | 35,854 |
Repurchase of common stock | | (2,754,923) | | | (27) |
| — | | | — |
| | (19,841) | | | — | | | (19,868) | | | (436) | | | (20,304) |
Restricted shares forfeited | | (63,118) | | | (1) |
| — | | | — |
| | (56) | | | — | | | (57) | | | 57 | | | — |
NCI income tax adjustment | | — | | | — |
| — | | | — |
| | 27 | | | — | | | 27 | | | (24) | | | 3 |
Net income |
| — | | | — |
| — | | | — |
| | — | | | 19,305 | | | 19,305 | | | 3,261 | | | 22,566 |
Balance as of June 30, 2022 |
| 98,160,573 | | $ | 982 |
| 16,221,101 | | $ | 162 |
| $ | 974,066 | | $ | (340,167) | | $ | 635,043 | | $ | 106,102 | | $ | 741,145 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | ||||||
| | Stockholders | | Stockholders | | | | | | | | | | | | | | | |||||||
| | | | Class A | | | | Class B | | Additional | | | | Total | | | | | | | |||||
| | | | Common | | | | Common | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | | | ||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | |||||||
Balance as of December 31, 2020 |
| 86,812,647 | | $ | 868 |
| 16,221,101 | | $ | 162 |
| $ | 909,278 | | $ | (317,247) | | $ | 593,061 | | $ | 112,821 | | $ | 705,882 |
ESPP shares issued | | 4,881 | | | — | | — | | | — | | | 30 | | | — | | | 30 | | | (1) | | | 29 |
Equity-based compensation | | — | | | — | | — | | | — | | | 3,333 | | | — | | | 3,333 | | | 613 | | | 3,946 |
Issuance of restricted shares | | 1,843,808 | | | 19 | | — | | | — | | | 1,881 | | | — | | | 1,900 | | | (1,900) | | | — |
Other | | 738 | | | — | | — | | | — | | | 5 | | | — | | | 5 | | | — | | | 5 |
Repurchase of common stock | | (199,976) | | | (2) | | — | | | — | | | (1,223) | | | — | | | (1,225) | | | 19 | | | (1,206) |
Restricted shares forfeited | | (301,395) | | | (3) | | — | | | — | | | (315) | | | — | | | (318) | | | 318 | | | — |
Noncontrolling interest in subsidiary | | — | | | — | | — | | | — | | | (140) | | | — | | | (140) | | | (934) | | | (1,074) |
NCI income tax adjustment | | — | | | — | | — | | | — | | | 23 | | | — | | | 23 | | | (23) | | | — |
Net loss |
| — | |
| — |
| — | |
| — |
|
| — | |
| (39,674) | |
| (39,674) | |
| (7,362) |
|
| (47,036) |
Balance as of June 30, 2021 |
| 88,160,703 | | $ | 882 |
| 16,221,101 | | $ | 162 |
| $ | 912,872 | | $ | (356,921) | | $ | 556,995 | | $ | 103,551 | | $ | 660,546 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
statements
89
SELECT ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the three months ended June 30, 2022 and 2021
(unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | ||||||
| | Stockholders | | Stockholders | | | | | | | | | | | | | | | |||||||
| | | | Class A | | | | Class B | | Additional | | | | Total | | | | | | | |||||
| | | | Common | | | | Common | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | | | ||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | |||||||
Balance as of March 31, 2022 |
| 98,111,119 | | $ | 981 |
| 16,221,101 | | $ | 162 |
| $ | 971,282 | | $ | (352,670) | | $ | 619,755 | | $ | 103,637 | | $ | 723,392 |
ESPP shares issued | | 1,591 | | | — | | — | | | — | | | 13 | | | — | | | 13 | | | — | | | 13 |
Equity-based compensation | | — | | | — | | — | | | — | | | 3,384 | | | — | | | 3,384 | | | 560 | | | 3,944 |
Issuance of restricted shares |
| 191,436 | |
| 2 |
| — | |
| — |
|
| 171 | |
| — | |
| 173 | |
| (173) |
|
| — |
Repurchase of common stock | | (94,595) | | | — | | — | | | — | | | (761) | | | — | | | (761) | | | (27) | | | (788) |
Restricted shares forfeited | | (48,978) | | | (1) | | — | | | — | | | (43) | | | — | | | (44) | | | 44 | | | — |
NCI income tax adjustment | | — | | | — | | — | | | — | | | 20 | | | — | | | 20 | | | (17) | | | 3 |
Net income |
| — | |
| — |
| — | |
| — |
|
| — | |
| 12,503 | |
| 12,503 | |
| 2,078 |
|
| 14,581 |
Balance as of June 30, 2022 |
| 98,160,573 | | $ | 982 |
| 16,221,101 | | $ | 162 |
| $ | 974,066 | | $ | (340,167) | | $ | 635,043 | | $ | 106,102 | | $ | 741,145 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | | | | | | | | | | | | | | | ||||||
| | Stockholders | | Stockholders | | | | | | | | | | | | | | | |||||||
| | | | Class A | | | | Class B | | Additional | | | | Total | | | | | | | |||||
| | | | Common | | | | Common | | Paid-In | | Accumulated | | Stockholders’ | | Noncontrolling | | | | ||||||
|
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | |||||||
Balance as of March 31, 2021 |
| 87,856,767 | | $ | 879 |
| 16,221,101 | | $ | 162 |
| $ | 910,688 | | $ | (340,354) | | $ | 571,375 | | $ | 106,574 | | $ | 677,949 |
ESPP shares issued | | 2,736 | | | — | | — | | | — | | | 16 | | | — | | | 16 | | | (1) | | | 15 |
Equity-based compensation | | — | | | — | | — | | | — | | | 2,131 | | | — | | | 2,131 | | | 393 | | | 2,524 |
Issuance of restricted shares | | 356,360 | | | 4 | | — | | | — | | | 352 | | | — | | | 356 | | | (356) | | | — |
Other | | 738 | | | — | | — | | | — | | | 5 | | | — | | | 5 | | | — | | | 5 |
Repurchase of common stock | | (55,898) | | | (1) | | — | | | — | | | (335) | | | — | | | (336) | | | 4 | | | (332) |
NCI income tax adjustment | | — | | | — | | — | | | — | | | 15 | | | — | | | 15 | | | (15) | | | — |
Net loss |
| — | |
| — |
| — | |
| — |
|
| — | |
| (16,567) | |
| (16,567) | |
| (3,048) |
|
| (19,615) |
Balance as of June 30, 2021 |
| 88,160,703 | | $ | 882 |
| 16,221,101 | | $ | 162 |
| $ | 912,872 | | $ | (356,921) | | $ | 556,995 | | $ | 103,551 | | $ | 660,546 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements
10
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||
|
| 2017 |
| 2016 | ||
Cash flows from operating activities |
|
|
|
|
|
|
Net loss |
| $ | (20,177) |
| $ | (289,235) |
Adjustments to reconcile net loss to net cash provided by operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
| 68,456 |
|
| 75,518 |
Gain on disposal of property and equipment |
|
| (3,127) |
|
| (30) |
Bad debt expense |
|
| 1,098 |
|
| 1,679 |
Amortization of debt issuance costs |
|
| 928 |
|
| 2,244 |
Equity-based compensation |
|
| 1,781 |
|
| 317 |
Impairment of goodwill and other intangible assets |
|
| — |
|
| 138,666 |
Impairment of property and equipment |
|
| — |
|
| 60,026 |
Other operating items |
|
| (560) |
|
| (806) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
Accounts receivable |
|
| (65,815) |
|
| 15,339 |
Prepaid expenses and other assets |
|
| (6,493) |
|
| 679 |
Accounts payable and accrued liabilities |
|
| 19,660 |
|
| 3,681 |
Net cash (used in) provided by operating activities |
|
| (4,249) |
|
| 8,078 |
Cash flows from investing activities |
|
|
|
|
|
|
Acquisitions, net of cash received |
|
| (62,199) |
|
| — |
Purchase of property and equipment |
|
| (66,013) |
|
| (28,630) |
Proceeds received from sale of property and equipment |
|
| 6,677 |
|
| 8,258 |
Net cash used in investing activities |
|
| (121,535) |
|
| (20,372) |
Cash flows from financing activities |
|
|
|
|
|
|
Proceeds from revolving line of credit |
|
| 34,000 |
|
| 18,500 |
Payments on long-term debt |
|
| (34,000) |
|
| (36,334) |
Payment of debt issuance costs |
|
| — |
|
| (2,775) |
Proceeds from initial public offering |
|
| 140,070 |
|
| — |
Payments incurred for initial public offering |
|
| (11,566) |
|
| — |
Purchase of noncontrolling interests |
|
| — |
|
| (318) |
Proceeds from (distributions to) noncontrolling interests |
|
| (368) |
|
| 138 |
Member contributions |
|
| — |
|
| 23,519 |
Net cash provided by financing activities |
|
| 128,136 |
|
| 2,730 |
Net increase (decrease) in cash and cash equivalents |
|
| 2,352 |
|
| (9,564) |
Cash and cash equivalents, beginning of period |
|
| 40,041 |
|
| 16,305 |
Cash and cash equivalents, end of period |
| $ | 42,393 |
| $ | 6,741 |
Supplemental cash flow disclosure: |
|
|
|
|
|
|
Cash paid for interest |
| $ | 1,139 |
| $ | 9,592 |
Cash paid for taxes |
| $ | 37 |
| $ | 619 |
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued liabilities |
| $ | 7,733 |
| $ | 2,479 |
| | | | | | |
| | Six months ended June 30, | ||||
|
| 2022 |
| 2021 | ||
Cash flows from operating activities |
| | | | | |
Net income (loss) | | $ | 22,566 | | $ | (47,036) |
Adjustments to reconcile net income (loss) to net cash used in operating activities | |
| | |
| |
Depreciation and amortization | |
| 56,846 | |
| 43,941 |
(Gain) loss on disposal of property and equipment and divestitures | |
| (2,384) | |
| 2,236 |
Equity in losses of unconsolidated entities | | | 358 | | | — |
Bad debt expense (recovery) | |
| 1,263 | |
| (381) |
Amortization of debt issuance costs | |
| 417 | |
| 344 |
Inventory write-downs | | | 189 | | | 82 |
Equity-based compensation | |
| 7,219 | |
| 3,946 |
Bargain purchase gain | |
| (17,041) | |
| — |
Unrealized loss on short-term investment | | | 40 | | | 1,169 |
Other operating items, net | |
| (478) | |
| (139) |
Changes in operating assets and liabilities | |
| | |
| |
Accounts receivable | |
| (89,653) | |
| (19,054) |
Prepaid expenses and other assets | |
| 5,620 | |
| (11,044) |
Accounts payable and accrued liabilities | |
| 7,570 | |
| 14,497 |
Net cash used in operating activities | |
| (7,468) | |
| (11,439) |
Cash flows from investing activities | |
| | |
| |
Purchase of property and equipment | |
| (30,976) | |
| (13,451) |
Investment in note receivable | | | — | |
| (1,101) |
Purchase of equity method investments | | | (4,267) | |
| (2,200) |
Collection of note receivable | | | 184 | |
| — |
Distribution from cost method investment | | | 60 | | | 120 |
Acquisitions, net of cash and restricted cash received | |
| 5,857 | |
| — |
Proceeds received from sales of property and equipment | |
| 17,683 | |
| 5,141 |
Other | | | (429) | |
| — |
Net cash used in investing activities | |
| (11,888) | |
| (11,491) |
Cash flows from financing activities | |
| | |
| |
Borrowings from revolving line of credit | | | 30,000 | | | — |
Payments on revolving line of credit | |
| (30,000) | |
| — |
Payments on long-term debt | |
| (18,780) | |
| — |
Payments of finance lease obligations | | | (103) | | | (156) |
Payment of debt issuance costs | |
| (2,144) | |
| — |
Proceeds from share issuance | | | 25 | | | 29 |
Distributions to noncontrolling interests | |
| — | |
| (1,074) |
Repurchase of common stock | |
| (19,695) | |
| (1,206) |
Net cash used in financing activities | |
| (40,697) | |
| (2,407) |
Effect of exchange rate changes on cash | |
| (6) | |
| 20 |
Net decrease in cash and cash equivalents | |
| (60,059) | |
| (25,317) |
Cash and cash equivalents, beginning of period | |
| 85,801 | |
| 169,039 |
Cash and cash equivalents, end of period | | $ | 25,742 | | $ | 143,722 |
Supplemental cash flow disclosure: | |
| | |
| |
Cash paid for interest | | $ | 817 | | $ | 741 |
Cash refunds received for income taxes, net | | $ | (497) | | $ | (962) |
Supplemental disclosure of noncash investing activities: | |
| | |
| |
Issuance of shares for acquisitions | | $ | 35,854 | | $ | — |
Conversion of notes receivable to equity-method investment | | $ | 4,442 | | $ | — |
Capital expenditures included in accounts payable and accrued liabilities | | $ | 20,214 | | $ | 6,038 |
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
911
SELECT ENERGY SERVICES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Description of the business: Select Energy Services, Inc. (“Select Energy Services”we,” “Select Inc.” or “the Company”the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of a membership interestcommon units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings” or the “Predecessor”). Unless otherwise stated or the context otherwise indicates, all references to the “Company” or similar expressions for time periods prior to the reorganization
We are a leading provider of comprehensive water-management and 144A Offering transactions refer to SES Holdings and its subsidiaries. For time periods subsequent to the reorganization and 144A Offering transactions, these terms refer to Select Energy Services and its subsidiaries.
SES Holdings was formed in July 2008 and, in October 2008, members of Select Energy Services, LLC (“Select LLC”), formerly known as Peak Oilfield Services, LLC (“Peak”), a Delaware limited liability company formed in December 2006, transferred all interests in Select LLC to SES Holdings in exchange for membership interests in SES Holdings and Select LLC became a wholly owned subsidiary of SES Holdings.
Select Energy Services is an oilfield services company that provides total waterchemical solutions to the U.S. conventional oil and natural gas industry. The Company offers water‑related services that supportindustry in the U.S. We also develop, manufacture and deliver a full suite of chemical solutions for use in oil and gas well completion and production activities including sourcing, transfer, containment, monitoring, treatment, flowback, hauling and disposaloperations. As a leader in the U.S. shale basins. These services establish and maintainwater solutions industry, we place the flowutmost importance on safe, environmentally responsible management of oil and natural gasoilfield water throughout the productive lifelifecycle of a horizontal well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.
TheClass A and Class B Common Stock: As of June 30, 2022, the Company also operates a wellsite services group to complement its total water solutions offering. These services include equipment rental, accommodations, cranehad both Class A and logistics services, wellsiteClass B common shares issued and pipeline construction, and field services. The Company conducts its wellsite services activities on a third‑party contractual basis unrelated to its water‑related services.
Reorganization: On December 20, 2016, Select Energy Services completed a private placement (the “144A Offering”)outstanding. Holders of 16,100,000 shares of our Class A‑1A common stock, par value $0.01 per share (“Select Class A-1A Common Stock”) at an offering price of $20.00 per share. In conjunction with the 144A Offering, SES Holdings’ then existing Class A and Class B units were converted into a single class of common units (the “SES Holdings LLC Units”) and SES Holdings effected a 10.3583 for 1 unit split. In exchange for the contribution of all net proceeds from the 144A Offering to SES Holdings, SES Holdings issued 16,100,000 SES Holdings LLC Units to Select Energy Services, and Select Energy Services became the sole managing member of SES Holdings. Select Energy Services issued 38,462,541 shares of Class B common stock, par value $0.01 per share (“Select Class B Common Stock”) are entitled to the other member of SES Holdings, SES Legacy Holdings, LLC (“Legacy Owner Holdco”), or one share for each SES Holdings LLC Unit held by Legacy Owner Holdco. The Company also acquired 3,802,972 SES Holdings LLC Units from certain legacy owners (the “Contributing Legacy Owners”) in exchange for the issuance of 3,802,972 shares of Class A common stock, par value $0.011 vote per share (“Select Class A Common Stock”). Shareholders of Select Class A‑1 Common Stock, Select Class A Common Stock, and Select Class B Common Stock vote together as a single class on all matters subjectpresented to certain exceptions in the Company’s amended and restated certificate of incorporation. Holders of Select Class B Common Stock have voting rights only and are not entitled to an economic interest in Select Energy Services based onour stockholders for their ownership of Select Class B Common Stock. The reorganization transactions were treated as a combination of entities under common control with assets and liabilities transferred at their carrying amounts in a manner similar to a pooling of interests.vote or approval.
Initial Public Offering: On April 26, 2017, the Company completed its initial public offering (“IPO”) of 8,700,000 shares of Select Class A Common Stock at a price of $14.00 per share. On May 10, 2017, the underwriters of the IPO exercised their over-allotment option to purchase an additional 1,305,000 shares of Select Class A Common Stock at the IPO price of $14.00 per share. After deducting underwriting discounts and commissions and estimated
10
offering expenses payable by it, the Company received approximately $128.5 million of the aggregate net proceeds from the IPO (including the over-allotment option). The Company contributed all of the net proceeds received by it to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds in the following manner: (i) $34.0 million was used to repay borrowings incurred under the Company’s Credit Facility to fund the cash portion of the purchase price of the GRR Acquisition, as defined below, (ii) $7.8 million was used for the cash settlement of outstanding phantom unit awards and (iii) the remaining net proceeds are intended to be used for general corporate purposes, including funding our 2017 budgeted capital expenditures.
Credit Facility: Concurrent with the closing of the 144A Offering, the Company repaid all of its outstanding indebtedness and amended its Credit Facility to reduce the total commitment of its revolving line of credit to $100.0 million. See Note 7—Debt for further discussion.
Exchange rights: rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner Holdco hasHoldco”) and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Select Class A Common Stock at an exchange ratio of one1 share of Select Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Select Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, the CompanySelect Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Select Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Select Class A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Select Class B Common Stock will be cancelled.
Registration rights: In December 2016, in connection with the closing of the 144A Offering, Select Energy Services entered into a registration rights agreement with FBR Capital Markets & Co. for the benefit of the investors in the 144A Offering. Under this registration rights agreement, the Company agreed, at its expense, to file with the SEC, in no event later than April 30, 2017, a shelf registration statement registering for resale the 16,100,000 shares of Select Class A Common Stock issuable upon conversion of the Select Class A‑1 Common Stock sold in the 144A Offering plus any additional shares of Class A‑1 common stock issued in respect thereof whether by stock dividend, stock distribution, stock split, or otherwise, and to use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable but in any event within 60 days after the closing of the IPO. The Company filed this registration statement with the SEC on April 28, and this registration statement was declared effective by the SEC on June 13, 2017. Accordingly, each share of Select Class A‑1 Common Stock outstanding automatically converted into a share of Select Class A Common Stock on a one‑for‑one basis at that time. In addition, Legacy Owner Holdco has the right, under certain circumstances, to cause the Company to register the shares of Select Class A Common Stock obtained pursuant to the Exchange Right.
Tax receivable agreements: Concurrent with the closing of the 144A Offering, the Company entered into two tax receivable agreements with Legacy Owner Holdco and certain legacy owners of SES Holdings. On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements. See Note 12—Related Party Transactions for further discussion.
Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United StatesU.S. (“GAAP”) and pursuant to the rules and regulations of the SEC. These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP. Accordingly,
This Quarterly Report relates to the accompanying unaudited interim consolidated financial statementsthree and related notessix months ended June 30, 2022 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2021 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) filed with the SEC on February 23, 2022, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) which, in the Company’s consolidated financial statementsopinion of management, are necessary for a fair statement of the results for the years ended December 31, 2016interim periods have been reflected. The results for the Current Quarter and 2015 includedCurrent Period may not be indicative of the results to be expected for the full year, in part due to the Final Prospectus. initiation of war between Russia and Ukraine, the continuing effects of the COVID-19 pandemic and large variations in oil and natural gas prices during the Current Quarter and Current Period.
12
The unaudited interim consolidated financial statements include the accounts of Select Energy Servicesthe Company and all of its majority‑ownedmajority-owned or controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
11
In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary for a fair presentation of our interim financial statements have been included in these unaudited interim consolidated financial statements. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.
The Company’s historical financial statements prior to the 144A Offering and reorganization transactions are prepared using SES Holdings’ historical basis in the assets and liabilities, and include all revenues, costs, assets and liabilities attributed to SES Holdings.
For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which Select Energy Servicesthe Company exercises significant influence over operating and financial policies are accounted for using the equity method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method.method or other appropriate basis as applicable. As of June 30, 2022, the Company had 3 equity-method investments and 1 cost-method investment. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. Our investments in unconsolidated entities are summarized below and are included in the assets of our Water Services segment:
| | | | | | | | | |
| Year | | | | | As of June 30, | | As of December 31, | |
Type of Investment | attained | Accounting method | Balance Sheet Location | | 2022 |
| 2021 | ||
| | | | | (in thousands) | ||||
20% minority interest | 2011 | Cost-method | Other long-term assets, net | | $ | 60 | | $ | 120 |
Notes receivable (1) | 2020 | Amortized cost basis | Other long-term assets, net | | | — | | | 4,446 |
21% minority interest (1) | 2021 | Equity-method | Other long-term assets, net | | | 4,442 | | | — |
33% minority interest | 2021 | Equity-method | Other long-term assets, net | | | 3,125 | | | 1,779 |
45% minority interest | 2021 | Equity-method | Other long-term assets, net | | | 2,705 | | | 142 |
(1) | Investment in notes receivable converted to equity-method investment during the Current Period. |
Segment reporting: The Company has 3 reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals. See “Note 16—Segment Information” for additional information.
The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business.
The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions, and our produced water gathering systems and saltwater disposal wells, as well as solids disposal facilities, primarily serving E&P companies.
The Oilfield Chemicals segment provides technical solutions and expertise related to chemical applications in the oil and gas industry. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, pipelines and well completions. We also have significant capabilities in supplying logistics for chemical applications. Given the breadth of chemicals and application expertise we provide, our customers range from pressure pumpers to major integrated and independent oil and gas producers. This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of water used in well completions.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies: OurThe Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the yearsyear ended December 31, 2016 and 20152021, included in the Final Prospectus. There have been no changes in such policies or the application2021 Form 10-K.
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Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long‑livedlong-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory reserve, income taxes, self‑insuranceself-insurance liabilities, share‑basedshare-based compensation, contingent liabilities, lease-related reasonably certain option exercise assessments, and contingent liabilities.the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.
Emerging GrowthAllowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company status: Undertreats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we are an “emerging growth company,” or an “EGC,”Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred when a customer’s financial condition significantly deteriorates, which allows usin some cases leads to have an extended transition periodbankruptcy. Market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for complyingcredit losses in future periods.
The change in the allowance for credit losses is as follows:
| | | |
| | Six months ended June 30, 2022 | |
| | (in thousands) | |
Balance as of December 31, 2021 | | $ | 4,401 |
Increase to allowance based on a percentage of revenue | |
| 1,263 |
Charge-offs | | | (16) |
Recoveries | | | 39 |
Balance as of June 30, 2022 | | $ | 5,687 |
Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with new or revised accounting standards pursuantobligations for plugging wells, removing surface equipment, and returning land to Section 107(b) ofits pre-drilling condition. The following table describes the JOBS Act. We intendchanges to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase‑in periodsCompany’s ARO liability for the adoptionCurrent Period:
| | | |
| | | |
|
| Six months ended June 30, 2022 | |
|
| (in thousands) | |
Balance as of December 31, 2021 |
| $ | 29,551 |
Accretion expense, included in depreciation and amortization expense |
| | 596 |
Acquired AROs |
| | 13,029 |
Divested | | | (1,181) |
Payments | | | (723) |
Balance as of June 30, 2022 |
| $ | 41,272 |
| | | |
Short-term ARO liability | | | 4,490 |
Long-term ARO liability | | | 36,782 |
Balance as of June 30, 2022 | | $ | 41,272 |
14
We review the adequacy of our ARO liabilities whenever indicators suggest that the JOBS Act until weestimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are no longer an emerging growth company. Our election to use the phase‑included in periods permitted by this election may make it difficult to compare our financial statements to those of non‑emerging growth companiesaccrued expenses and other emerging growth companies that have opted out of the longer phase‑in periods under Section 107 of the JOBS Actcurrent liabilities and who will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply immediately with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
Recent accounting pronouncements: In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), outlining a comprehensive new revenue recognition standard that will supersede ASC 605, Revenue Recognition. The new accounting guidance creates a framework under which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a
12
contract, estimating the amount of variable consideration to includeother long-term liabilities in the transaction price, allocating the transaction price to each separate performance obligation, and determining when an entity satisfies its performance obligations. The standard allows for either “full retrospective” adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch‑up as of the earliest period presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch‑up as of the current period. In August 2015, the FASB decided to defer the original effective date by one year. As long as the Company is an EGC and able to utilize the extended transition period for new accounting pronouncements, this guidance will be effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. accompanying consolidated balance sheets.
Lessor Income: The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statementsa lessor for a nominal number of owned facilities and related disclosures and has not yet determined the method by which it will adopt the standard.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which amends existing guidance onalso recognizes income taxes to require the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018, and may be applied either prospectively or retrospectively. The Company prospectively adopted this guidance during the nine months ended September 30, 2017. Prior periods were not retrospectively adjusted. As the Company’s deferred tax assets and liabilities are all noncurrent, the adoption did not result in a change to the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in the current accounting guidance as well as the FASB’s new revenue recognition standard. However, the ASU eliminates the use of bright‑line tests in determining lease classification as required in the current guidance. The ASU also requires additional qualitative disclosures along with specific quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, using a modified retrospective approach. Early adoption is permitted. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, that provides a new requirement to record all of the tax effects related to share‑based payments at settlement (or expiration) through the income statement. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. The Company is still evaluating the impactmultiple facility subleases that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses the classification and presentation of eight specific cash flow issues that currently result in diverse practices. The amendments provide guidance in the presentation and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero‑coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate‑owned life insurance policies, and distributions received from equity method investees. As an EGC utilizing the extended transition period for new accounting pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied using a retrospective approach. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should beare accounted for as follows:
| | | | | | | | | | | | | |
| | | Three months ended June 30, | | Six months ended June 30, | ||||||||
| |
| 2022 |
| 2021 |
| 2022 | | 2021 | ||||
| | | (in thousands) | ||||||||||
Category | Classification | | | | | | | | | | | | |
Lessor income | Costs of revenue | | $ | 48 | | $ | 60 | | $ | 164 | | $ | 126 |
Sublease income | Lease abandonment costs and Costs of revenue | | | 361 | | | 231 | | | 707 | | | 474 |
The Company also generates short-term equipment rental revenue. See “Note 4—Revenue” for a discussion of revenue recognition for the accommodations and rentals business.
Defined Contribution Plan: During 2020, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) plan and the suspension continued into the first half of 2021. Effective July 1, 2021, the Company reinstated matching contributions of 50% of employee contributions, up to 4% of eligible earnings. The Company incurred $0.7 million, 0, $1.2 million and 0 match expense in the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
Payroll Tax Deferral: In 2020, the Company took advantage of the employer payroll tax deferral provision in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and deferred the payment of $6.0 million of payroll taxes. Half of the deferral was paid during the fourth quarter of 2021 and the remaining balance of $3.0 million must be repaid by December 31, 2022. The remaining deferral is reported under accrued salaries and benefits on the accompanying consolidated balance sheets as of June 30, 2022.
Severance: During the Prior Period, the Company incurred $3.2 million of severance in connection with the termination of its former chief executive officer, which was paid in full during the first quarter of 2021 and included in selling, general and administrative in the consolidated statements of operations.
NOTE 3—ACQUISITIONS
Business combinations
The following table presents key information connected with our 2022 and 2021 acquisitions (or disposals) of assets or businesses. As an EGC utilizing the extended transition period for new accounting(dollars in thousands, except share amounts):
| | | | | | | | | |
Assets and Operations Acquired | Acquisition Date | Shares Issued | | Cash Consideration | | Value of Shares Issued | | Total Consideration | Segments |
Nuverra | February 23, 2022 | 4,203,323 | $ | — | $ | 35,854 | $ | 35,854 | Water Services & Water Infrastructure |
HB Rentals | December 3, 2021 | 1,211,375 | | 2,610 | | 7,135 | | 9,745 | Water Services |
Agua Libre and Basic | October 1, 2021 | 902,593 | | 16,394 | | 4,684 | | 21,078 | Water Services & Water Infrastructure |
Complete | July 9, 2021 | 3,600,000 | | 14,356 | | 20,304 | | 34,660 | Water Services & Water Infrastructure |
Total | | 9,917,291 | $ | 33,360 | $ | 67,977 | $ | 101,337 | |
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pronouncements, this pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied prospectively. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This pronouncement removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This pronouncement is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied prospectively. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This pronouncement provides guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The pronouncement should be applied prospectively to an award modified on or after the adoption date. The Company is still evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.
NOTE 3— ACQUISITIONS
Business combinationsNuverra Acquisition
On September 15, 2017,February 23, 2022, the Company completed itsthe acquisition (the “Resource Water Acquisition”of Nuverra Environmental Solutions, Inc. (“Nuverra”) for total consideration of Resource Water Transfer Services, L.P. and certain other affiliated assets (collectively, “Resource Water”). Resource Water provides water transfer services to exploration and production (“E&P”) operators in West Texas and East Texas. Resource Water’s assets include 24 miles$35.9 million based on the closing price of layflat hose as well as numerous pumps and ancillary equipment required to support water transfer operations. Resource Water has longstanding customer relationships across its operating regions which are viewed as strategic to the Company’s water solutions business.
The total consideration for the Resource Water Acquisition was $9.1 million, with $6.7 million paid in cash and $2.4 million paid in shares of Select Class A Common Stock valued at $15.17 per share, subject to customary post‑closing adjustments. The Company funded the cash portionon February 23, 2022 (the “Nuverra Acquisition”). Consideration transferred consisted of the consideration for the Resource Water Acquisition with $6.7 million of cash on hand. For the nine months ended September 30, 2017, the Company expensed less than $0.1 million of related transaction-related costs. The Resource Water Acquisition is being accounted for as a business combination under the acquisition method of accounting. The preliminary allocation of the consideration transferred is based on management’s estimates, judgments and assumptions. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments, and assumptions. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. Working capital estimates are based on provisional amounts. Management estimated that total consideration paid exceeded the fair value of the net assets acquired by $1.8 million, which excess was recognized as goodwill. The goodwill recognized was attributable to Resource Water’s assembled workforce as well as synergies related to the Company’s comprehensive water solutions strategy. The goodwill was included in the assets of the Company’s Water Solutions segment. The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
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Preliminary purchase price allocation |
| Amount | |
Consideration transferred |
| (in thousand) | |
Cash paid |
| $ | 6,692 |
Class A common stock issued |
|
| 2,380 |
Total consideration transferred |
|
| 9,072 |
Less: identified assets |
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|
|
Working capital |
|
| 1,396 |
Fixed assets |
|
| 3,485 |
Customer relationship intangible assets |
|
| 1,912 |
Other intangible assets |
|
| 466 |
Total identified assets |
|
| 7,259 |
Goodwill |
| $ | 1,813 |
On March 10, 2017, the Company completed its acquisition (the “GRR Acquisition”) of Gregory Rockhouse Ranch, Inc. and certain other affiliated entities and assets (collectively, the “GRR Entities”). The GRR Entities provide water and water‑related services to E&P companies in the Permian Basin and own and have rights to a vast array of fresh, brackish and effluent water sources with access to significant volumes of water annually and water transport infrastructure, including over 900 miles of temporary and permanent pipeline infrastructure and related storage facilities and pumps, all located in the northern Delaware Basin portion of the Permian Basin.
The total consideration for the GRR Acquisition was $56.8 million, with $51.3 million paid in cash and $5.5 million paid in4,203,323 shares of Select Class A Common Stock valued at $20.00 per share, subjectStock. The acquisition strengthens Select’s geographic footprint with a unique set of water logistics and infrastructure assets, particularly in the Bakken, Haynesville and Northeast, while continuing to customary post‑closing adjustments. The Company fundedexpand Select’s production-related revenues. Select also acquired a 60-mile underground twin pipeline network in the cash portion of the considerationHaynesville Shale in Texas and Louisiana. This pipeline network is used for the GRRcollection of produced water for transport to interconnected disposal wells and the delivery or re-delivery of water from water sources to operator locations for use in well completion activities. Additionally, Nuverra operates a landfill facility in North Dakota located on a 50-acre site. The facility provides a unique opportunity for Select to expand its logistics capabilities into a new service offering. The acquisition is expected to result in a bargain purchase gain based on our preliminary evaluation, as Nuverra was experiencing financial distress and actively evaluating strategic alternatives leading up to the transaction.
The Nuverra Acquisition with $17.3 million of cash on hand and $34.0 million of borrowings under the Company’s Credit Facility. For the nine months ended September 30, 2017, the Company expensed $1.0 million of transaction-related costs. The GRR Acquisition is beingwas accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. Management estimated that consideration paid exceededThe Company has engaged third-party valuation experts to assist in the fair valuepurchase price allocation. These estimates, judgments and assumptions and valuation of the netproperty and equipment acquired, current assets, acquired. Therefore, goodwillcurrent liabilities and long-term liabilities have not been finalized as of $11.0June 30, 2022. The Nuverra debt, including accrued interest, totaled $18.8 million, and was recorded. The goodwill recognized is primarily attributable to synergies related torepaid during the Company’s comprehensive water solutions strategy that are expected to arise fromCurrent Period after the GRR Acquisition and is attributable to the Company’s Water Solutions segment.acquisition was completed. The assets acquired and liabilities assumed and the results of operations of the acquired business are included in the Company’s Water Solutions segment. Services and Water Infrastructure segments. The Company incurred $0.4 million and $3.1 million of transaction-related costs related to this acquisition in the Current Quarter and Current Period, respectively, and such costs are included in selling, general and administrative within the consolidated statements of operations.
The Company assumed $1.6 million of severance liabilities in connection with the Nuverra acquisition and $0.2 million is included in accrued salaries and benefits as of June 30, 2022.
The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
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Preliminary purchase price allocation | | As Reported as of March 31, 2022 | | Current Quarter Adjustment | | Amount | |||
Consideration transferred | | (in thousands) | |||||||
Class A Common Stock (4,203,323 shares) | | $ | 35,854 | | $ | — | | $ | 35,854 |
Total consideration transferred |
| | 35,854 | | | — | | | 35,854 |
Less: identifiable assets acquired and liabilities assumed |
| | | | | | | | |
Working capital |
| | 8,093 | | | (275) | | | 7,818 |
Property and equipment |
| | 65,138 | | | — | | | 65,138 |
Right-of-use assets |
| | 2,931 | | | — | | | 2,931 |
Other long-term assets | | | 229 | | | (129) | | | 100 |
Long-term debt | | | (18,780) | | | — | | | (18,780) |
Long-term ARO | | | (8,104) | | | (4,876) | | | (12,980) |
Long-term lease liabilities | | | (1,189) | | | — | | | (1,189) |
Deferred tax liabilities | | | (120) | | | 120 | | | — |
Other long-term liabilities | | | (500) | | | 500 | | | — |
Total identifiable net assets acquired | | | 47,698 | | | (4,660) | | | 43,038 |
Bargain Purchase Gain |
| | (11,844) | | | 4,660 | | | (7,184) |
Fair value allocated to net assets acquired, net of bargain purchase gain |
| $ | 35,854 | | $ | — | | $ | 35,854 |
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|
Preliminary purchase price allocation |
| Amount | |
Consideration transferred |
| (in thousand) | |
Cash paid |
| $ | 51,303 |
Class A common stock issued |
|
| 5,500 |
Total consideration transferred |
|
| 56,803 |
Less: identified assets |
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|
|
Working capital |
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| 6,000 |
Fixed assets |
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| 13,225 |
Customer relationship intangible assets |
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| 21,392 |
Other intangible assets |
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| 5,150 |
Total identified assets |
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| 45,767 |
Goodwill |
| $ | 11,036 |
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HB Rentals Acquisition
ResourceOn December 3, 2021, the Company, through its subsidiary Peak Oilfield Services, LLC, completed the acquisition of certain assets of H.B. Rentals, L.C. (“HB Rentals”), an operating subsidiary of Superior Energy Services, Inc. (“Superior”), for total initial consideration of $8.7 million based on the closing price of the Company’s shares of Class A Common Stock on December 2, 2021 (the “HB Rentals Acquisition”). Consideration transferred consisted of 1,211,375 shares of Class A Common Stock and $1.5 million in cash. The Company paid $1.1 million on April 1, 2022, representing the final working capital settlement. The Company acquired the U.S. onshore assets of HB Rentals, including working capital. This acquisition strengthens the Company’s accommodations and rentals footprint in the Permian, Haynesville, MidCon, Northeast and Rockies regions and adds revenue-producing fixed assets including a significant number of skid houses and trailer houses. The acquisition resulted in a bargain purchase gain in part due to the seller recently emerging from bankruptcy and deciding to divest domestic assets and operations and focus on international operations.
The HB Rentals Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. These estimates, judgments and assumptions and valuation of the property and equipment acquired, current assets, current liabilities and long-term liabilities have been finalized as of June 30, 2022. The assets acquired and liabilities assumed are included in the Company’s Water Acquisition contributed revenue and net income of $0.2 million and less thanServices segment. The Company incurred $0.1 million respectively,of transaction-related costs related to this acquisition in the resultsCurrent Period, and such costs are included in selling, general and administrative within the consolidated statements of operations.
The following table summarizes the Company fromconsideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition through September 30, 2017. The GRR Acquisition contributed revenueacquisition:
| | | | | | | | | |
Purchase price allocation | | As Reported as of December 31, 2021 | | Current Period Adjustment | | Amount | |||
Consideration transferred | | (in thousands) | |||||||
Class A Common Stock (1,211,375 shares) | | $ | 7,135 | | $ | — | | $ | 7,135 |
Cash paid | | | 1,526 | | | — |
| | 1,526 |
Final working capital settlement | | | — | | | 1,084 | | | 1,084 |
Total consideration transferred | | | 8,661 | | | 1,084 |
| | 9,745 |
Less: identifiable assets acquired and liabilities assumed | | |
| | |
|
| |
|
Working capital | | | 29 | | | 880 |
| | 909 |
Property and equipment | | | 14,091 | | | 929 |
| | 15,020 |
Right-of-use assets | | | 1,316 | | | — |
| | 1,316 |
Long-term lease liabilities | | | (835) | | | — | | | (835) |
Total identifiable net assets acquired | | | 14,601 | | | 1,809 |
| | 16,410 |
Bargain Purchase Gain | | | (5,940) | | | (725) |
| | (6,665) |
Fair value allocated to net assets acquired, net of bargain purchase gain | | $ | 8,661 | | $ | 1,084 |
| $ | 9,745 |
Agua Libre Midstream and net income of $21.5 million and $1.9 million, respectively, to the consolidated results of the Companywater-related assets from the date of acquisition through September 30, 2017. The following unaudited consolidated
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pro forma information is presented as if the GRR Acquisition and Resource Water Acquisition had occurred on January 1, 2016:
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| Pro Forma |
| Pro Forma | ||||||||
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| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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| (unaudited) |
| (unaudited) | ||||||||
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| (in thousands) |
| (in thousands) | ||||||||
Revenue |
| $ | 156,045 |
| $ | 82,824 |
| $ | 400,948 |
| $ | 237,644 |
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Net income (loss) |
| $ | 3,195 |
| $ | (34,344) |
| $ | (17,951) |
| $ | (289,130) |
Less: net (income) loss attributable to noncontrolling interests 1 |
|
| (1,706) |
|
| 19,284 |
|
| 11,682 |
|
| 163,044 |
Net income (loss) attributable to Select Energy Services, Inc. 1 |
| $ | 1,489 |
| $ | (15,060) |
| $ | (6,269) |
| $ | (126,086) |
1 The allocation of net loss attributable to noncontrolling interests and SelectBasic Energy Services gives effect to the equity structure as of September 30, 2017 as though the 144A Offering, the IPO, the Resource Water Acquisition the GRR Acquisition and other equity transactions occurred as of January 1, 2016. However, the calculation of pro forma net loss does not give effect to any other pro forma adjustments for the 144A Offering or the subsequent IPO.
The unaudited pro forma amounts above have been calculated after applying the Company’s accounting policies and adjusting the GRR Acquisition and Resource Water Acquisition results to reflect the increase to depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2016 and other related pro forma adjustments. The pro forma amounts do not include any potential synergies, cost savings or other expected benefits of the GRR Acquisition or Resource Water Acquisition, and are presented for illustrative purposes only and are not necessarily indicative of results that would have been achieved if the GRR Acquisition and Resource Water Acquisition had occurred as of January 1, 2016 or of future operating performance.
Asset acquisitions
On June 21, 2017October 1, 2021, the Company completed the acquisition of fixedcertain assets of Agua Libre Midstream, LLC (“Agua Libre”) and other water-related assets, operations and assumed liabilities from Tex-StarBasic Energy Services, Inc. (“Basic”) for total initial consideration of $21.1 million based on the closing price of the Company’s shares of Class A Common Stock on September 30, 2021 (the “Agua Libre and Basic Acquisition”). Consideration transferred consisted of 902,593 shares of Class A Common Stock and $16.4 million in cash. The Company acquired substantially all of the water-related assets and ongoing operations of Agua Libre and Basic, including working capital. With this acquisition, the Company has acquired a solid production services footprint in Texas, New Mexico, Oklahoma and North Dakota, as well as more than 550,000 barrels per day of permitted disposal capacity. The acquisition is expected to result in a
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bargain purchase gain as the seller was distressed and decided to divest its assets and operations to multiple buyers as operations were wound down and the business was shuttered.
The Agua Libre and Basic Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. The Company also engaged third-party valuation experts to assist in the purchase price allocation. These estimates, judgments and assumptions and valuation of the property and equipment acquired, current assets, current liabilities and long-term liabilities have not been finalized as of June 30, 2022. The business combination accounting is preliminary due to the continuing efforts to validate the existence and condition of the property and equipment acquired. The assets acquired and liabilities assumed are included in the Company’s Water Services LLC (the “TEX Acquisition”) for $4.2and Water Infrastructure segments. The Company incurred $0.2 million and $0.6 million of transaction-related costs related to this acquisition in cash, funded entirely with cash on hand.the Current Quarter and Current Period, respectively, and such costs are included in selling, general and administrative within the consolidated statements of operations.
The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
| | | | | | | | | |
Preliminary purchase price allocation | | As Reported as of December 31, 2021 | | Current Period Adjustment | | Amount | |||
Consideration transferred | | (in thousands) | |||||||
Class A Common Stock (902,593 shares) | | $ | 4,684 | | $ | — | | $ | 4,684 |
Cash paid | | | 16,394 | | | — | | | 16,394 |
Total consideration transferred | | | 21,078 | | | — |
| | 21,078 |
Less: identifiable assets acquired and liabilities assumed | | | | | | |
| | |
Working capital | | | (506) | | | 37 |
| | (469) |
Property and equipment | | | 41,000 | | | 9,486 |
| | 50,486 |
Right-of-use assets | | | 309 | | | — |
| | 309 |
Long-term ARO | | | (15,810) | | | — | | | (15,810) |
Long-term lease liabilities | | | (281) | | | 10 | | | (271) |
Total identifiable net assets acquired | | | 24,712 | | | 9,533 | | | 34,245 |
Bargain Purchase Gain | | | (3,634) | | | (9,533) |
| | (13,167) |
Fair value allocated to net assets acquired, net of bargain purchase gain | | $ | 21,078 | | $ | — |
| $ | 21,078 |
Complete Energy Services Acquisition
On May 30, 2017July 9, 2021, the Company completed the acquisition of automated manifold intellectual property and related assets from Data Automated Water Systems, LLC (the “DAWS“Complete Acquisition”) of Complete Energy Services, Inc. (“Complete”), an operating subsidiary of Superior Energy Services, Inc. (“Superior”) for $4.0 million. This acquisition was paid with $2.0initial consideration of $34.5 million based on the closing price of cash and 128,370the Company’s shares of Select Class A Common Stock valued at approximately $2.0on July 9, 2021. Consideration transferred consisted of 3.6 million shares of Class A Common Stock and $14.2 million in cash. In October 2021, the Company paid $0.2 million related to the settlement of the working capital which resulted in a final purchase price of $34.7 million. The DAWS AcquisitionCompany acquired substantially all of the water-related assets, liabilities and ongoing operations of Complete as well as Superior’s well testing operations, including working capital. Superior retained certain non-core and non-water-related assets that were part of Complete as part of the transaction. This acquisition expands the Company’s water-related services and infrastructure footprint and strengthens the geographic footprint, particularly in the Mid-Continent, Permian and Rockies. The acquisition resulted in fixeda bargain purchase gain in part due to the seller recently emerging from bankruptcy and deciding to divest domestic assets and operations and focus on international operations.
The Complete Acquisition was accounted for as a business combination under the acquisition method of $1.8accounting. When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. The Company also engaged third-party valuation experts to assist in the purchase price allocation. These estimates, judgments and assumptions and valuation of the property and equipment acquired, current
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assets, current liabilities and long-term liabilities have been finalized as of June 30, 2022. The assets acquired and liabilities assumed are included in the Company’s Water Services and Water Infrastructure segments. The Company incurred less than $0.1 million, patents of $1.9$0.1 million, $0.4 million and software$0.1 million of $0.3 million.transaction-related costs related to this acquisition in the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively, and such costs are included in selling, general and administrative within the consolidated statements of operations.
NOTE 4—EXIT AND DISPOSAL ACTIVITIES
Due to a reduction in industry activity from 2014,The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition:
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Purchase price allocation | | As Reported as of December 31, 2021 | | Current Period Adjustment | | Amount | |||
Consideration transferred | | (in thousands) | |||||||
Class A Common Stock (3,600,000 shares) | | $ | 20,304 | | $ | — | | $ | 20,304 |
Cash paid | | | 14,356 | | | — | | | 14,356 |
Total consideration transferred |
| | 34,660 | | | — | | | 34,660 |
Less: identifiable assets acquired and liabilities assumed |
| | | | | | | | |
Working capital |
| | 15,783 | | | (200) | | | 15,583 |
Property and equipment |
| | 36,761 | | | (201) | | | 36,560 |
Right-of-use assets |
| | 3,331 | | | — | | | 3,331 |
Other long-term assets | | | 24 | | | — | | | 24 |
Long-term ARO | | | (9,800) | | | — | | | (9,800) |
Long-term lease liabilities | | | (2,028) | | | — | | | (2,028) |
Total identifiable net assets acquired | | | 44,071 | | | (401) | | | 43,670 |
Bargain Purchase Gain |
| | (9,411) | | | 401 | | | (9,010) |
Fair value allocated to net assets acquired, net of bargain purchase gain |
| $ | 34,660 | | $ | — | | $ | 34,660 |
Contingent Consideration
In connection with an August 2021 business combination, the Company maderecorded a $1.1 million contingent earn-out liability. The maximum earn-out is $1.6 million, dependent on revenue generated in the decision duringfirst and second 12-month periods following the year endedacquisition, beginning on October 1, 2021. This liability was $1.1 million as of both June 30, 2022 and December 31, 20162021 and is recorded in other long-term liabilities.
NOTE 4—REVENUE
The Company follows ASU 2014-09, Revenue from Contracts with Customers (Topic 606), for most revenue recognition, which provides a five-step model for determining revenue recognition for arrangements that are within the scope of the standard: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to close 15 facilitiesthe performance obligations in the contract; and consolidate operations(v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model only to contracts when it is probable that we will collect the consideration the Company is entitled to in exchange for the purposegoods or services the Company transfers to the customer. The accommodations and rentals revenue continues to be guided by ASC 842 – Leases, which is discussed further below.
The following factors are applicable to all 3 of improving operating efficiencies.the Company’s segments for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively:
● | The vast majority of customer agreements are short-term, lasting less than one year. |
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● | Contracts are seldom combined together as virtually all of our customer agreements constitute separate performance obligations. Each job is typically distinct, thereby not interdependent or interrelated with other customer agreements. |
● | Most contracts allow either party to terminate at any time without substantive penalties. If the customer terminates the contract, the Company is unconditionally entitled to the payments for the services rendered and products delivered to date. |
● | Contract terminations before the end of the agreement are rare. |
● | Sales returns are rare and no sales return assets have been recognized on the balance sheet. |
● | There are minimal volume discounts. |
● | There are no service-type warranties. |
● | There is no long-term customer financing. |
In the Water Services and Water Infrastructure segments, performance obligations arise in connection with services provided to customers in accordance with contractual terms, in an amount the Company expects to collect. Services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenues are generated by services rendered and measured based on output generated, which is usually simultaneously received and consumed by customers at their job sites. As a multi-job site organization, contract terms, including pricing for the Company’s services, are negotiated on a job site level on a per-job basis. Most jobs are completed in a short period of time, usually between one day and one month. Revenue is recognized as performance obligations are completed on a daily, hourly or per unit basis with unconditional rights to consideration for services rendered reflected as accounts receivable trade, net of allowance for credit losses. In cases where a prepayment is received before the Company satisfies its performance obligations, a contract liability is recorded in accrued expenses and other current liabilities. Final billings generally occur once all of the proper approvals are obtained. Mobilization and demobilization are factored into the pricing for services. Billings and costs related to mobilization and demobilization are not material for customer agreements that start in one period and end in another. As of June 30, 2022, the Company had eight contracts in place for these segments lasting over one year. The Company has recorded $2.9a $5.7 million contract liability associated with one of charges related to exit and disposal activities and reclassified $0.2the eight long-term contracts as of June 30, 2022, of which $3.7 million of deferred rent related to accrued lease obligations related to exited facilities during the nine months ended September 30, 2017. The Company had a remaining balance of $20.0 million, inclusive of a short‑term balance of $1.9 millionis recognized in accrued expenses and other current liabilities and $2.0 million is recognized in other long-term liabilities in the accompanying consolidated balance sheets. This liability was $8.2 million as of September 30, 2017 related to accrued lease obligationsDecember 31, 2021 and terminations at exited facilities within its Water Solutions segment. As of September 30, 2017, the Company has completed its exitrecognized $2.5 million in revenue during the Current Period. The Company expects this contract liability to be converted to revenue under the terms of the contract as it is earned.
Accommodations and rentals revenue is included in the Water Services segment and the Company accounts for accommodations and rentals agreements as an operating lease. The Company recognizes revenue from underperforming facilities but will continuerenting equipment on a straight-line basis. Accommodations and rental contract periods are generally daily, weekly or monthly. The average lease term is less than three months and as of June 30, 2022, there were no material rental agreements in effect lasting more than one year. During the Current Quarter, Prior Quarter, Current Period and Prior Period, approximately $17.6 million, $6.7 million, $33.2 million and $12.9 million of accommodations and rentals revenue was accounted for under ASC 842 lease guidance, with the remainder accounted for under ASC 606 revenue guidance.
In the Oilfield Chemicals segment, the typical performance obligation is to make non‑cancelable lease payments for relatedprovide a specific quantity of chemicals to customers in accordance with the customer agreement in an amount the Company expects to collect. Products and services are generally sold based upon customer orders or contracts with customers that include fixed or determinable prices. Revenue is recognized as the customer takes title to chemical products in accordance with the agreement. Products may be provided to customers in packaging or delivered to the customers’ containers through a hose. In some cases, the customer takes title to the chemicals upon consumption from storage containers on their property, where the chemicals are considered inventory until customer usage. In cases where the Company delivers
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products and recognizes revenue before collecting payment, the Company usually has an unconditional right to payment reflected in accounts receivable trade, net of allowance for credit losses. Customer returns are rare and immaterial and there were no material in-process customer agreements for this segment as of June 30, 2022, lasting greater than one year.
The following table sets forth certain financial information with respect to the Company’s disaggregation of revenues by geographic location:
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| | Three months ended June 30, | | Six months ended June 30, | | ||||||||
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| 2022 |
| 2021 | | 2022 |
| 2021 |
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| | (in thousands) | | ||||||||||
Geographic Region | | | | | | | | | | | | | |
Permian Basin | | $ | 149,640 | | $ | 83,355 | | $ | 286,124 | | $ | 154,559 | |
Eagle Ford | | | 40,438 | | | 24,569 | | | 73,292 | | | 45,354 | |
Rockies | | | 38,139 | | | 9,196 | | | 71,617 | | | 19,218 | |
Mid-Continent | | | 31,526 | | | 9,527 | | | 60,790 | | | 18,003 | |
Marcellus/Utica | | | 33,924 | | | 13,251 | | | 57,753 | | | 24,918 | |
Haynesville/E. Texas | | | 26,304 | | | 18,303 | | | 52,779 | | | 35,568 | |
Bakken | | | 18,546 | | | 3,864 | | | 31,997 | | | 10,767 | |
Eliminations and other regions | | | (2,614) | | | (948) | | | (3,680) | | | (3,528) | |
Total | | $ | 335,903 | | $ | 161,117 | | $ | 630,672 | | $ | 304,859 | |
In the Water Services segment, the top 3 revenue-producing regions are the Permian Basin, Marcellus/Utica and Rockies, which collectively comprised 68%, 67%, 69% and 65%, of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Water Infrastructure segment, the top 3 revenue-producing regions are the Permian Basin, Eagle Ford and Bakken, which collectively comprised 87%, 97%, 90% and 97% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. In the Oilfield Chemicals segment, the top 3 revenue-producing regions are the Permian Basin, Haynesville/E. Texas and Eagle Ford, which collectively comprised 78%, 86%, 78% and 84% of segment revenue for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
NOTE 5—INVENTORIES
Inventories, which are comprised of chemicals and raw materials available for resale and parts and consumables used in operations, are valued at the lower of cost and net realizable value, with cost determined under the weighted-average method. The significant components of inventory are as follows:
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| June 30, 2022 |
| December 31, 2021 | ||
| | (in thousands) | ||||
Raw materials | | $ | 19,141 | | $ | 20,396 |
Finished goods | |
| 20,248 | |
| 24,060 |
Total | | $ | 39,389 | | $ | 44,456 |
During the Current Quarter, Prior Quarter, Current Period and Prior Period, the Company recorded net charges to the reserve for excess and obsolete inventory of $0.3 million, less than $0.1 million, $0.2 million and $0.1 million, respectively, which were recognized within costs of revenue on the accompanying consolidated statements of operations. The Company’s inventory reserve was $4.1 million and $3.9 million as of June 30, 2022 and December 31, 2021, respectively. The reserve for excess and obsolete inventories is determined based on the Company’s historical usage of inventory on hand, as well as future expectations and the amount necessary to reduce the cost of the inventory to its estimated net realizable value.
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facilities through the year ended 2027. The Company’s abandonmentTable of these facilities is not a part of a formalized exit plan.Contents
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| September 30, 2017 |
| September 30, 2017 |
| September 30, 2017 | ||||
|
| (in thousands) | ||||||||||
Lease obligations and terminations |
| $ | 18,000 |
| $ | 2,871 |
| $ | 2,153 |
| $ | 18,718 |
Reclassification of deferred rent |
|
| 1,069 |
|
|
|
|
|
|
|
| 1,254 |
Total |
| $ | 19,069 |
|
|
|
|
|
|
| $ | 19,972 |
NOTE 5—6—PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Depreciation (and amortization of finance lease assets) is calculated on a straight-line basis over the estimated useful life of each asset. Property and equipment consists of the following as of SeptemberJune 30, 20172022 and December 31, 2016:2021:
| | | | | | |
|
| | | | | |
|
| June 30, 2022 |
| December 31, 2021 | ||
| | (in thousands) | ||||
Machinery and equipment | | $ | 645,566 | | $ | 626,633 |
Buildings and leasehold improvements | |
| 131,769 | |
| 108,177 |
Pipelines | | | 72,829 | | | 72,829 |
Gathering and disposal infrastructure | |
| 64,265 | |
| 63,228 |
Vehicles and equipment | |
| 28,501 | |
| 28,502 |
Land | | | 22,928 | | | 16,873 |
Computer equipment and software | | | 4,956 | | | 5,395 |
Office furniture and equipment | |
| 773 | |
| 764 |
Machinery and equipment - finance lease | |
| 533 | |
| 544 |
Vehicles and equipment - finance lease | |
| 58 | |
| 324 |
Computer equipment and software - finance lease | |
| 56 | |
| 412 |
Construction in progress | |
| 40,996 | |
| 19,834 |
| |
| 1,013,230 | |
| 943,515 |
Less accumulated depreciation(1) | |
| (574,348) | |
| (551,727) |
Total property and equipment, net | | $ | 438,882 | | $ | 391,788 |
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||
|
| (in thousands) | ||||
Land |
| $ | 7,106 |
| $ | 8,593 |
Buildings and leasehold improvements |
|
| 83,328 |
|
| 83,352 |
Vehicles and equipment |
|
| 38,547 |
|
| 24,114 |
Machinery and equipment |
|
| 564,741 |
|
| 534,303 |
Computer equipment and software |
|
| 11,438 |
|
| 11,102 |
Office furniture and equipment |
|
| 3,709 |
|
| 4,275 |
Disposal wells |
|
| 67,778 |
|
| 67,566 |
Helicopters |
|
| 497 |
|
| 497 |
Construction in progress |
|
| 37,858 |
|
| 5,584 |
|
|
| 815,002 |
|
| 739,386 |
Less accumulated depreciation and impairment |
|
| (535,456) |
|
| (490,519) |
Total property and equipment, net |
| $ | 279,546 |
| $ | 248,867 |
(1) | Includes $0.6 million and $1.1 million of accumulated depreciation related to finance leases as of June 30, 2022 and December 31, 2021, respectively. |
Total depreciation and amortization expense related to property and equipment and finance leases presented in the table above, as well as amortization of intangible assets presented in “Note 7— Other Intangible Assets” is as follows:
Long‑lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | ||||
| | (in thousands) | ||||||||||
Category | | | | | | | | | | | | |
Depreciation expense from property and equipment | | $ | 26,751 | | $ | 19,017 | | $ | 50,704 | | $ | 38,604 |
Amortization expense from finance leases | | | 41 | | | 21 | | | 101 | | | 103 |
Amortization expense from intangible assets | | | 2,720 | | | 2,616 | | | 5,445 | | | 5,233 |
Accretion expense from asset retirement obligations | | | 267 | | | (12) | | | 596 | | | 1 |
Total depreciation and amortization | | $ | 29,779 | | $ | 21,642 | | $ | 56,846 | | $ | 43,941 |
22
Table of an asset may not be recoverable.Contents
The Company had no capital lease obligations as of September 30, 2017 and December 31, 2016.
NOTE 6—GOODWILL AND 7—OTHER INTANGIBLE ASSETS
Goodwill is evaluated for impairment on at least an annual basis as of December 31, or more frequently if indicators of impairment exist. The annual impairment tests are based on Level 3 inputs. The changes in the carrying
17
amounts of goodwill by reportable segment for the nine months ended September 30, 2017 and the year ended December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Wellsite Completion |
|
|
|
|
|
| |
|
| Water |
| and Construction |
| Accommodations |
|
|
| |||
|
| Solutions |
| Services |
| and Rentals |
| Total | ||||
|
| (in thousands) | ||||||||||
Balance as of December 31, 2015 |
| $ | 137,534 |
| $ | 12,242 |
| $ | 995 |
| $ | 150,771 |
Impairment |
|
| (137,534) |
|
| — |
|
| (995) |
|
| (138,529) |
Balance as of December 31, 2016 |
|
| — |
|
| 12,242 |
|
| — |
|
| 12,242 |
Additions |
|
| 12,849 |
|
| — |
|
| — |
|
| 12,849 |
Balance as of September 30, 2017 |
| $ | 12,849 |
| $ | 12,242 |
| $ | — |
| $ | 25,091 |
The components of other intangible assets, net as of June 30, 2022 and December 31, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | |||||||
|
| Gross |
| Accumulated |
| Net | |||
|
| Value |
| Amortization |
| Value | |||
|
| (in thousands) | |||||||
Customer relationships |
| $ | 80,131 |
| $ | 54,987 |
| $ | 25,144 |
Other |
|
| 13,222 |
|
| 3,015 |
|
| 10,207 |
Total other intangible assets |
| $ | 93,353 |
| $ | 58,002 |
| $ | 35,351 |
| | | | | | | | | | | | | | | | | | | |||||||||
| | As of June 30, 2022 | | As of December 31, 2021 | |||||||||||||||||||||||
|
| Gross |
| Accumulated |
| Net |
| Gross | | Accumulated |
| Net | |||||||||||||||
| | Value | | Amortization | | Value | | Value | | Amortization | | Value | |||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| December 31, 2016 | |||||||||||||||||||||||||
|
| Gross |
| Accumulated |
| Net | |||||||||||||||||||||
|
| Value |
| Amortization |
| Value | |||||||||||||||||||||
|
| (in thousands) | |||||||||||||||||||||||||
| | (in thousands) | | (in thousands) | |||||||||||||||||||||||
Definite-lived | | | | | | | | | | | | | | | | | | | |||||||||
Customer relationships |
| $ | 56,826 |
| $ | 48,236 |
| $ | 8,590 | | $ | 116,554 | | $ | (42,904) | | $ | 73,650 | | $ | 116,554 | | $ | (38,371) | | $ | 78,183 |
Patents and other intellectual property | | | 12,772 | | | (5,007) | | | 7,765 | | | 12,772 | | | (4,313) | | | 8,459 | |||||||||
Other |
|
| 5,491 |
|
| 2,495 |
|
| 2,996 | | | 7,234 | | | (7,008) | | | 226 | |
| 7,234 | |
| (6,795) | |
| 439 |
Total other intangible assets |
| $ | 62,317 |
| $ | 50,731 |
| $ | 11,586 | ||||||||||||||||||
Total definite-lived | | | 136,560 | | | (54,919) | | | 81,641 | | | 136,560 | | | (49,479) | | | 87,081 | |||||||||
Indefinite-lived | | | | | | | | | | | | | | | | | | | |||||||||
Water rights | | | 7,031 | | | — | | | 7,031 | | | 7,031 | | | — | | | 7,031 | |||||||||
Trademarks | | | 14,360 | | | — | | | 14,360 | | | 14,360 | | | — | | | 14,360 | |||||||||
Total indefinite-lived | | | 21,391 | | | — | | | 21,391 | | | 21,391 | | | — | | | 21,391 | |||||||||
| | | | | | | | | | | | | | | | | | | |||||||||
Total other intangible assets, net | | $ | 157,951 | | $ | (54,919) | | $ | 103,032 | | $ | 157,951 | | $ | (49,479) | | $ | 108,472 |
Intangibles obtained through acquisitionsThe weighted-average amortization period for customer relationships, patents and other intellectual property, and other definite-lived assets was 8.2 years, 5.9 years, and 2.2 years, respectively, as of June 30, 2022. See “Note 6—Property and Equipment” for the amortization expense during the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. The indefinite-lived water rights and trademarks are initially recorded at estimated fair value based on preliminary information that isgenerally subject to change until final valuations are obtained. Customer relationships and non‑compete agreements are being amortized over estimated useful lives ranging from renewal every five to seventen years at immaterial renewal costs. Annual amortization of intangible assets for the next five years and three to five years, respectively. Other intangible assets primarily relate to certain water rights that are amortized over estimated useful lives ranging from three to eight years. Intangible assets obtained in the GRR Acquisition consisted of customer relationships and non-compete agreements that will be amortized over estimated useful lives of thirteen and five years, respectively, with a weighted-average estimated useful life of 12.5 years. As a result of the GRR Acquisition, the Company also obtained water rights totaling $3.7 million that have indefinite lives and will be evaluated periodically for impairment. Intangible assets obtained in the Resource Water Acquisition consisted of customer relationships and non-compete agreements that will be amortized over estimated useful lives of ten and three years, respectively, with a weighted-average estimated useful life of 8.6 years. The Company acquired patents of $1.9 millionbeyond is as part of the DAWS Acquisition, which are being amortized over the estimated useful lives of ten years. See Note 3 – Acquisitions for further discussion.follows:
Amortization expense was $2.6 million and $2.1 million for the three months ended September 30, 2017 and 2016, respectively, and $7.3 million and $6.7 million for the nine months ended September 30, 2017 and 2016, respectively.
| | | |
| Amount | ||
| | (in thousands) | |
Remainder of 2022 | | $ | 5,225 |
Year ending December 31, 2023 | | 10,594 | |
Year ending December 31, 2024 | | 10,525 | |
Year ending December 31, 2025 | | 10,362 | |
Year ending December 31, 2026 | | 10,274 | |
Thereafter | | | 34,661 |
Total | | $ | 81,641 |
1823
NOTE 7—8—DEBT
Credit Facility term loansSustainability-linked credit facility and revolving line of credit
Select Energy Services’ Credit Facility, originally executed in May 2011, has been amended over time. Effective December 20, 2016, the Company amended its Credit Facility to extend the maturity date from February 28, 2018 to February 28, 2020 and reduce the revolving line of credit to $100.0 million. The agreement also amended certain financial covenants and restrictions and outlined a new pricing grid that is effective after receipt of the third quarter 2017 compliance certificate. Accrued interest is payable at the end of each quarter. The Credit Facility has a variable interest rate that ranges from either (i) the London interbank rate (“LIBOR”On March 17, 2022 (the “Restatement Date”) plus a margin for Eurodollar advances or (ii) the applicable base rate plus a margin for base rate advances based on the Company’s Leverage Ratio (as defined in the Credit Facility) falling between 2.00% and 4.00% as outlined below. In addition, a commitment fee related to the revolving line of credit is payable at the end of each calendar quarter based on a rate of 0.500% per annum on any unused portion of the commitment under the Credit Facility. Effective June 13, 2017, the Company amended its Credit Facility to permanently waive the default associated with the DAWS Acquisition. This waiver is specifically for such acquisition and does not remedy any other present or future defaults associated with the Credit Facility.
|
|
|
|
|
|
Leverage Ratio Before Receipt of Fourth Quarter 2017 |
| Eurodollar |
| Base Rate |
|
Compliance Certificate |
| Advances |
| Advances |
|
< 4.00 |
| 4.00 | % | 3.00 | % |
≥ 4.00 |
| 4.50 | % | 3.50 | % |
|
|
|
|
|
|
Leverage Ratio After Receipt of Fouth Quarter 2017 |
| Eurodollar |
| Base Rate |
|
Compliance Certificate |
| Advances |
| Advances |
|
< 2.00 |
| 3.00 | % | 2.00 | % |
≥ 2.00 < 2.50 |
| 3.25 | % | 2.25 | % |
≥ 2.50 < 3.00 |
| 3.50 | % | 2.50 | % |
≥ 3.00 < 3.50 |
| 3.75 | % | 2.75 | % |
≥ 3.50 < 4.00 |
| 4.00 | % | 3.00 | % |
≥ 4.00 |
| 4.50 | % | 3.50 | % |
Select Energy Services had no debt outstanding under the revolving line of credit as of September 30, 2017 and December 31, 2016. The borrowing capacity under the revolving line of credit was reduced by outstanding letters of credit of $14.1 million as of September 30, 2017. The Company’s letters of credit have a variable interest rate between 3.00% and 4.50% based on the Company’s Leverage Ratio as outlined above. The unused portion of the available borrowings under the revolving line of credit was $85.9 million at September 30, 2017.
Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of September 30, 2017 were $3.0 million. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheet.
The Company’s obligations under its Credit Facility are secured by substantially all of its assets. The Credit Facility contains customary events of default and covenants and limits its ability to incur additional indebtedness, pay dividends or make other distributions, create liens and sell assets. The Company was in compliance with all debt covenants as of September 30, 2017.
19
NOTE 8—COMMITMENTS AND CONTINGENCIES
Litigation
The Company is named from time to time in various legal proceedings in the ordinary course of business. The legal proceedings are at different stages; however, the Company does not believe the resolution of any of these proceedings would be material to its financial position or results of operations.
General Business Risk
As discussed in Note 1, the substantial majority of the Company’s customers are in the oil and gas industry. The oil and gas industry is currently facing unique challenges due to the continued volatility and depressed state of oil and gas prices.
NOTE 9—EQUITY‑BASED COMPENSATION
The, SES Holdings, 2011 Equity Incentive Plan, (“2011 Plan”) was approved by the Predecessor’s board of managers in April 2011. In conjunction with the 144A Offering, the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended from time to time, the “2016 Plan”) for employees, consultants and directorsa subsidiary of the Company, and its affiliates. Options that were outstanding under the 2011 Plan immediately prior to the 144A Offering were cancelled in exchange for new options granted under the 2016 Plan.
On July 18, 2017, the Select Energy Services, board of directors approved the First Amendment to the 2016 Plan (the “Equity Plan Amendment”LLC (“Select LLC”), which clarifies the treatment of substitute awards under the 2016 Plan (including substitute awards that may be granted in connection with the Merger (as defined in Note 17 below)) and allows for the assumption by the Company of shares eligible under any pre-existing stockholder-approved plan of an entity acquired by the Company or its affiliate (including the Rockwater Energy Solutions Inc. Amended and Restated 2017 Long Term Incentive Plan (the “Rockwater Equity Plan”)), in each case subject to the listing rules of the stock exchange on which Select Class A Common Stock is listed. The effectiveness of the Equity Plan Amendment was subject to approval by the Company's stockholders and the consummation of the transactions contemplated by the Merger Agreement (as defined in Note 17 below). The Company’s consenting stockholders, who hold a majority of the outstanding common stock of Select Energy Services, approved the Equity Plan Amendment on July 18, 2017. The Equity Plan Amendment became effective on November 1, 2017 upon the consummation of the Merger.
The maximum number of shares initially reserved for issuance under the 2016 Plan was 5,400,400 shares of Select Class A Common Stock, subject to adjustment in the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. Stock options are granted with terms not to exceed ten years. After giving effect to the Equity Plan Amendment, the maximum number of shares of Select Class A Common Stock reserved for issuance under the 2016 Plan is equal to (i) 5,400,400 shares plus (ii) 1,011,087 shares that became available on account of the assumption of the Rockwater Equity Plan, subject to adjustment in the event of recapitalization or reorganization, or related to forfeitures or the expiration of awards. The maximum number of shares described in the preceding sentence does not take into account 2,887,048 shares of Select Class A Common Stock related to substitute awards that were granted under the 2016 Plan following the conversion of outstanding equity awards originally granted under the Rockwater Equity Plan in accordance with the Merger Agreement. For additional information on such substitute awards, please see Note 17 below.
Phantom unit awards granted under the 2011 Plan, upon vesting, entitled each participant with the right to receive an amount of cash based in part on the fair market value of a share of Select Class A Common Stock on the date of the IPO. Based on the fair market value of a share of Select Class A Common Stock of $14.00 on the date of the IPO, each participant received a cash payment equal to $5.53 for each phantom unit on May 5, 2017. Refer to “Phantom Unit Awards” for details related to the payments made in respect of outstanding phantom units in connection with the IPO.
20
Stock option awards
Stock options were granted with an exercise price equal to or greater than the fair market value of a share of Select Class A Common Stock as of the date of grant. The Company historically valued Select Class A Common Stock on a quarterly basis using a market approach that includes a comparison to publicly traded peer companies using earnings multiples based on their market values and a discount for lack of marketability. The fair value measurement relies on Level 3 inputs. The estimated fair value of its stock options is expensed over their vesting period, which is generally three years from the applicable date of grant. However, certain awards that were granted during 2016 in exchange for cancelled awards were immediately vested and fully exercisable on the date of grant because they were granted in exchange for the cancellation of outstanding options granted under the 2011 Plan that were fully vested and exercisable prior to such cancellation. The Company utilizes the Black‑Scholes model to determine fair value, which incorporates assumptions to value equity‑based awards. The risk‑free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. At the time of grant, there was no public market for the Company’s equity. Therefore, the Company considered the historic volatility of publicly traded peer companies when determining the volatility factor. The expected life of the options was based on a formula considering the vesting period and term of the options awarded, which is generally seven to ten years.
A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2017 is as follows:
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 | |||
|
|
|
| Weighted-average | |
|
| Equity Options |
| Exercise Price | |
Beginning balance |
| 620,721 |
| $ | 16.50 |
Granted |
| 455,130 |
|
| 20.00 |
Forfeited |
| (98,499) |
|
| 20.00 |
Ending balance |
| 977,352 |
| $ | 17.78 |
The weighted‑average grant date fair value of stock options granted during the nine months ended September 30, 2017 was $7.85. The relevant assumptions for stock options granted during the period are as follows:
|
|
|
|
|
|
| $20.00 Strike |
| |
Underlying Equity |
| $ | 20.00 |
|
Strike Price |
| $ | 20.00 |
|
Dividend Yield (%) |
|
| 0.0 | % |
Risk free rate (%) |
|
| 1.68 - 2.00 | % |
Volatility (%) |
|
| 46.6 - 46.8 | % |
Expected Term (Years) |
|
| 4-6 |
|
There was no vested stock option activity, or exercise of vested stock options, during the nine months ended September 30, 2017.
A summary of the Company’s restricted stock unit activity and related information for the nine months ended September 30, 2017 is as follows:
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 |
| |||
|
|
|
| Weighted-average |
| |
|
| Restricted Stock |
| Grant Date Fair Value |
| |
Beginning balance |
| — |
| $ | — |
|
Granted |
| 41,117 |
|
| 19.91 |
|
Forfeited |
| (10,757) |
|
| 20.00 |
|
Ending balance |
| 30,360 |
| $ | 19.88 |
|
21
The Company recognized approximately $0.6 million and $0.0 million of compensation expense related to stock options and restricted stock unit awards during the three months ended September 30, 2017 and 2016, respectively. The Company recognized approximately $1.8 million and $0.3 million of compensation expense related to stock options and restricted stock unit awards during the nine months ended September 30, 2017 and 2016, respectively.
Phantom unit awards
The Company’s phantom unit awards were cash settled awards that were contingent upon meeting certain equity returns and a liquidation event. The settlement amount was based on the fair market value of a share of Select Class A Common Stock on the date of completion of the IPO, which constituted a liquidation event with respect to such phantom unit awards. As a result of the cash‑settlement feature of these awards, the Company considered these awards to be liability awards, which are measured at fair value at each reporting date and the pro rata vested portion of the award is recognized as a liability to the extent that the performance condition is deemed probable. On May 5, 2017, the Company settled its outstanding phantom unit awards for an aggregate amount equal to $7.8 million as a result of the completion of its IPO, which constituted a liquidity event with respect to such phantom unit awards. Based on the fair market value of a share of Select Class A Common Stock on the date of the IPO of $14.00, the cash payment with respect to each phantom unit was approximately $5.53, before employer taxes. The Company recognized compensation expense of $7.8 million during the nine months ended September 30, 2017 related to the settlement of its phantom unit awards. As of September 30, 2017 there are no phantom units outstanding.
NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS
The Company had variable rate debt outstanding which was subject to interest rate risk based on volatility in underlying interest rates. In April 2013, the Company entered into a pay fixed, receive variable interest rate swap, with an aggregate notional amount of $125.0 million, which the Company designated as a cash flow hedge. The derivative contract matured in April 2016. The change in value and amounts reclassified to interest expense during the nine months ended September 30, 2016 were nominal. There was no activity during the nine months ended September 30, 2017.
Changes in the fair values of the Company’s derivative instruments are presented on a net basis in the accompanying consolidated statements of operations. Changes in the fair value of the Company’s interest rate swap derivative instruments are as follows:
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NOTE 11—FAIR VALUE MEASUREMENT
The Company utilizes fair value measurements to measure assets and liabilities in a business combination or assess impairment of property and equipment, intangible assets and goodwill. Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurements, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.
22
ASC 820 establishes a three‑level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Quoted prices for similar assets or liabilities in non‑active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Company’s own assumptions in determining fair value).
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers into, or out of, the three levels of the fair value hierarchy for the nine months ended September 30, 2017 or the year ended December 31, 2016.
Other fair value considerations
The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade and accounts payable, approximate their fair value at September 30, 2017 and December 31, 2016 due to the short‑term maturity of these instruments. The Company had no outstanding debt as of September 30, 2017 and December 31, 2016. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange. The consideration transferred and the purchase price allocation of identified assets acquired and liabilities assumed related to the GRR Acquisition and Resource Water Acquisition are based on the Company’s estimate of fair value utilizing Level 3 inputs at the date of acquisition. Refer to Note 3 – Acquisitions for further discussion.
NOTE 12—RELATED PARTY TRANSACTIONS
The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing persons. The Company has entered into a significant number of transactions with related parties. The Company’s board of directors regularly reviews these transactions; however, the Company’s results of operations may have been different if these transactions were conducted with non‑related parties.
During the three months ended September 30, 2017, sales to related parties were $0.4 million and purchases from related party vendors were $2.1 million. These purchases comprised $0.7 million relating to purchases of property and equipment, less than $0.1 million relating to inventory and consumables, $0.8 million relating to rent of certain equipment or other services used in operations, and $0.5 million relating to management, consulting and other services. During the three months ended September 30, 2016, sales to related parties were $0.2 million and purchases from related party vendors were $0.9 million. These purchases comprised $0.4 million relating to purchases of property and equipment, less than $0.1 million relating to inventory and consumables, less than $0.1 million relating to rent of certain equipment or other services used in operations, and $0.4 million relating to management, consulting and other services.
During the nine months ended September 30, 2017, sales to related parties were $1.5 million and purchases from related party vendors were $5.0 million. These purchases comprised $1.4 million relating to purchases of property and equipment, $0.2 million relating to inventory and consumables, $1.7 million relating to rent of certain equipment or other services used in operations, and $1.7 million relating to management, consulting and other services. During the nine months ended September 30, 2016, sales to related parties were $0.8 million and purchases from related party vendors were $2.6 million. These purchases comprised $0.6 million relating to purchases of property and equipment,
23
$0.1 million relating to inventory and consumables, $0.4 million relating to rent of certain equipment or other services used in operations, and $1.5 million relating to management, consulting and other services.
Tax receivable agreements
In connection with the 144A Offering, the Company entered into two tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco, Crestview Partners II GP, L.P. (“Crestview GP”), and certain affiliates of Predecessor unitholders (collectively, the “TRA Holders”).
The first of the Tax Receivable Agreements, which the Company entered into with Legacy Owner Holdco and Crestview GP, generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the 144A Offering as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s SES Holdings LLC Units in connection with the 144A Offering or pursuant to the exercise of the Exchange Right or the Company’s Call Right and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under such Tax Receivable Agreement.
The second of the Tax Receivable Agreements, which the Company entered into with an affiliate of the Contributing Legacy Owners and Crestview GP, generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the 144A Offering as a result of, as applicable to each such TRA Holder, (i) any net operating losses available to the Company as a result of certain reorganization transactions entered into in connection with the 144A Offering and (ii) imputed interest deemed to be paid by the Company as a result of any payments the Company makes under such Tax Receivable Agreement.
On July 18, 2017, the Company’s board of directors approved amendments to each of the Tax Receivable Agreements revising the definition of a “change of control” for purposes of the Tax Receivable Agreements and acknowledging that the Merger would not result in such a change of control.
NOTE 13—INCOME TAXES
The Company is subject to U.S. federal and state income taxes as a corporation. SES Holdings and its subsidiaries, with the exception of certain corporate subsidiaries, are treated as flow‑through entities for U.S. federal income tax purposes, and as such, are generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to their taxable income is passed through to their members or partners. Accordingly, prior to our reorganization in connection with the 144A Offering, the Predecessor only recorded a provision for Texas franchise tax and U.S. federal and state provisions for certain corporate subsidiaries as the Predecessor’s taxable income or loss was includable in the income tax returns of the individual partners and members. However, for periods following our reorganization in connection with the 144A Offering, Select Energy Services recognizes a tax liability on its allocable share of SES Holdings’ taxable income.
The Company’s effective tax rates for the three months ended September 30, 2017 and 2016 were (12.8)% and 0.1%, respectively. The Company’s effective tax rates for the nine months ended September 30, 2017 and 2016 were (1.6)% and 0.1%, respectively. The effective tax rates for the three and nine months ended September 30, 2017 differ from the statutory rate of 35% due to net income allocated to noncontrolling interests, state income taxes, other permanent differences between book and tax accounting, and valuation allowances.
24
The Company recorded income tax expense (benefit) of $(0.3) million and less than $0.1 million for the three months ended September 30, 2017 and 2016, respectively. The Company recorded income tax expense (benefit) of $(0.3) million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.
The tax benefits of deferred tax assets are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. When the future utilization of some portion of deferred tax assets is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded tax benefits from such assets. As of September 30, 2017, management’s assessment as to the realizability of certain deferred tax assets has resulted in the recording of a valuation allowance to reduce deferred tax assets to the amounts that are considered more likely than not to be realized. Management believes there will be sufficient future taxable income based on the reversal of temporary differences to enable utilization or sustainability of those deferred tax assets that do not have a valuation allowance recorded against them.
Separate federal and state income tax returns are filed for Select Energy Services, SES Holdings, and certain consolidated affiliates. The tax years 2013 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject to income tax. Select Energy Services and SES Holdings are not currently under any income tax audits.
Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of September 30, 2017 and December 31, 2016, there was no material liability or expense for the periods then ended recorded for payments of interest and penalties associated with uncertain tax positions or material unrecognized tax positions and the Company’s unrecognized tax benefits were not material.
NOTE 14—NONCONTROLLING INTERESTS
The Company has ownership interests in multiple subsidiaries that are consolidated within the Company’s financial statements but are not wholly owned. During the nine months ended September 30, 2017 and 2016, the Company entered into transactions that impacted its ownership interest in certain of these subsidiaries while maintaining control over such subsidiaries. As a result of the Company’s change in ownership interest in these subsidiaries, the Company reduced its noncontrolling interests and recognized an increase in equity related to transactions with holders of noncontrolling interests. The Company reports a noncontrolling interest representing the common units of SES Holdings held by Legacy Owner Holdco. Changes in Select Energy Services’ ownership interest in SES Holdings while it retains its controlling interest are accounted for as equity transactions.
25
The following table summarizes the effects of changes in noncontrolling interests on equity for the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
| For the nine months ended September 30, | ||||
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
Net loss attributable to Select Energy Services, Inc. and its Predecessor |
| $ | (7,164) |
| $ | (285,359) |
Transfers from noncontrolling interests: |
|
|
|
|
|
|
Increase in additional paid-in capital as a result of the contribution of proceeds from the IPO to SEC Holdings, LLC in exchange for common units |
|
| 87,835 |
|
| — |
Increase in additional paid-in capital as a result of the contribution of assets acquired to SES Holdings, LLC in exchange for common units |
|
| 4,360 |
|
| — |
Increase in contributed capital due to purchase of noncontrolling interest |
|
| — |
|
| 135 |
Change to equity from net loss attributable to Select Energy Services, Inc. and its Predecessor and transfers from noncontrolling interests |
| $ | 85,031 |
| $ | (285,224) |
NOTE 15—EARNINGS PER SHARE
Earnings per share are based on the amount of income allocated to the shareholders and the weighted‑average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 597,749 and 977,352 shares are not included in the calculation of diluted weighted-average shares outstanding for the three and nine months ended September 30, 2017 as the effect is antidilutive.
26
Earnings related to periods prior to the reorganization and 144A Offering are attributable to the Predecessor. The following table presents the Company’s calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
| Nine months ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | (20,177) |
| $ | (289,235) |
|
Net loss attributable to Predecessor |
|
| — |
|
| 34,931 |
|
| — |
|
| 285,359 |
|
Net (income) loss attributable to noncontrolling interests |
|
| (1,369) |
|
| 273 |
|
| 13,013 |
|
| 3,876 |
|
Net income (loss) attributable to Select Energy Services, Inc. |
| $ | 1,224 |
| $ | — |
| $ | (7,164) |
| $ | — |
|
Allocation of net income (loss) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1 stockholders |
| $ | — |
|
|
|
| $ | (2,679) |
|
|
|
|
Class A stockholders |
|
| 1,224 |
|
|
|
|
| (4,485) |
|
|
|
|
Class B stockholders |
|
| — |
|
|
|
|
| — |
|
|
|
|
|
| $ | 1,224 |
|
|
|
| $ | (7,164) |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Basic |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A-Basic |
|
| 30,336,923 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B-Basic |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Basic |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A-Basic |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B-Basic |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Diluted |
|
| — |
|
|
|
|
| 9,671,795 |
|
|
|
|
Class A-Diluted |
|
| 30,357,572 |
|
|
|
|
| 16,189,997 |
|
|
|
|
Class B-Diluted |
|
| 38,462,541 |
|
|
|
|
| 38,462,541 |
|
|
|
|
Net income (loss) per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1-Diluted |
| $ | — |
|
|
|
| $ | (0.28) |
|
|
|
|
Class A-Diluted |
| $ | 0.04 |
|
|
|
| $ | (0.28) |
|
|
|
|
Class B-Diluted |
| $ | — |
|
|
|
| $ | — |
|
|
|
|
NOTE 16—SEGMENT INFORMATION
Select Energy Services is an oilfield services company that provides solutions to the North American onshore oil and natural gas industry. The Company’s services are offered through three operating segments. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker assesses performance and allocates resources on the basis of the three reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate. Each operating segment reflects a reportable segment led by separate managers that report
27
directly to the Company’s CODM. The Company’s CODM assesses performance and allocates resources on the basis of the following three reportable segments:
Water Solutions—The Water Solutions segment provides water‑related services to customers that include major integrated oil companies and independent oil and natural gas producers. These services include: the sourcing of water; the transfer of the water to the wellsite through permanent pipeline infrastructure and temporary pipe; the containment of fluids off‑ and on‑location; measuring and monitoring of water; the filtering and treatment of fluids, well testing and handling of flowback and produced formation water; and the transportation and recycling or disposal of drilling, completion and production fluids.
Accommodations and Rentals—The Accommodations and Rentals segment provides workforce accommodations and surface rental equipment supporting drilling, completion and production operations to the U.S. onshore oil and gas industry.
Wellsite Completion and Construction Services—The Wellsite Completion and Construction Services segment provides oil and natural gas operators with a variety of services, including crane and logistics services, wellsite and pipeline construction and field services. These services are performed to establish, maintain and improve production throughout the productive life of an oil or gas well, or to otherwise facilitate other services performed on a well.
Financial information as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016, by segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2017 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 125,142 |
| $ | 9,844 |
| $ | 19,433 |
| $ | 22,260 |
Accommodations and Rentals |
|
| 15,974 |
|
| (304) |
|
| 2,908 |
|
| 3,541 |
Wellsite Completion and Construction Services |
|
| 13,301 |
|
| (2) |
|
| 1,079 |
|
| 1,303 |
Elimination |
|
| (537) |
|
| — |
|
| — |
|
| — |
Income from operations |
|
|
|
|
| 9,538 |
|
|
|
|
|
|
Corporate |
|
| — |
|
| (7,081) |
|
| 375 |
|
| — |
Interest expense, net |
|
| — |
|
| (484) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 326 |
|
| — |
|
| — |
|
| $ | 153,880 |
| $ | 2,299 |
| $ | 23,795 |
| $ | 27,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended September 30, 2016 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 61,082 |
| $ | (28,278) |
| $ | 17,690 |
| $ | 4,668 |
Accommodations and Rentals |
|
| 5,881 |
|
| (2,786) |
|
| 2,644 |
|
| 268 |
Wellsite Completion and Construction Services |
|
| 7,156 |
|
| (1,325) |
|
| 1,279 |
|
| 95 |
Elimination |
|
| (212) |
|
| — |
|
| — |
|
| — |
Loss from operations |
|
|
|
|
| (32,389) |
|
|
|
|
|
|
Corporate |
|
| — |
|
| 1,123 |
|
| 363 |
|
| — |
Interest expense, net |
|
| — |
|
| (4,343) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 431 |
|
| — |
|
| — |
|
| $ | 73,907 |
| $ | (35,178) |
| $ | 21,976 |
| $ | 5,031 |
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2017 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 311,645 |
| $ | 5,652 |
| $ | 55,623 |
| $ | 57,273 |
Accommodations and Rentals |
|
| 39,056 |
|
| (3,813) |
|
| 8,367 |
|
| 8,311 |
Wellsite Completion and Construction Services |
|
| 38,951 |
|
| 56 |
|
| 3,154 |
|
| 6,598 |
Elimination |
|
| (1,398) |
|
| — |
|
| — |
|
| — |
Loss from operations |
|
|
|
|
| 1,895 |
|
|
|
|
|
|
Corporate |
|
| — |
|
| (23,855) |
|
| 1,312 |
|
| — |
Interest expense, net |
|
| — |
|
| (1,885) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 3,342 |
|
| — |
|
| — |
|
| $ | 388,254 |
| $ | (20,503) |
| $ | 68,456 |
| $ | 72,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended September 30, 2016 | ||||||||||
|
|
|
|
| Income (loss) before |
| Depreciation and |
| Capital | |||
|
| Revenue |
| taxes |
| Amortization |
| Expenditures | ||||
|
| (in thousands) | ||||||||||
Water Solutions |
| $ | 173,294 |
| $ | (264,416) |
| $ | 61,574 |
| $ | 28,533 |
Accommodations and Rentals |
|
| 19,750 |
|
| (8,303) |
|
| 8,197 |
|
| 834 |
Wellsite Completion and Construction Services |
|
| 23,098 |
|
| (3,820) |
|
| 4,103 |
|
| 215 |
Elimination |
|
| (477) |
|
| — |
|
| — |
|
| — |
Loss from operations |
|
|
|
|
| (276,539) |
|
|
|
|
|
|
Corporate |
|
| — |
|
| (1,100) |
|
| 1,644 |
|
| — |
Interest expense, net |
|
| — |
|
| (11,792) |
|
| — |
|
| — |
Other income, net |
|
| — |
|
| 588 |
|
| — |
|
| — |
|
| $ | 215,665 |
| $ | (288,843) |
| $ | 75,518 |
| $ | 29,582 |
|
|
|
|
|
|
|
|
| Total Assets | ||||
|
| As of |
| As of | ||
|
| September 30, 2017 |
| December 31, 2016 | ||
|
| (in thousands) | ||||
Water Solutions |
| $ | 448,585 |
| $ | 324,171 |
Accommodations and Rentals |
|
| 50,057 |
|
| 38,874 |
Wellsite Completion and Construction Services |
|
| 38,827 |
|
| 29,994 |
Corporate |
|
| 15,280 |
|
| 12,027 |
|
| $ | 552,749 |
| $ | 405,066 |
NOTE 17—SUBSEQUENT EVENTS
Completion of the Merger
On November 1, 2017, the Company completed the transactions contemplated by the Agreement and Plan of Merger, dated as of July 18, 2017 (the “Merger Agreement”), by and among the Company, SES Holdings, Raptor Merger Sub, Inc. (“Corporate Merger Sub”), Raptor Merger Sub, LLC (“LLC Merger Sub”), Rockwater Energy Solutions, Inc. (“Rockwater”) and Rockwater Energy Solutions, LLC (“RES Holdings”). Pursuant to the Merger Agreement, Corporate Merger Sub merged with and into Rockwater, with Rockwater continuing as the surviving entity as a wholly owned subsidiary of the Company (the “Corporate Merger”), and LLC Merger Sub merged with and into RES Holdings, with RES Holdings continuing as the surviving entity as an indirect wholly ownedwholly-owned subsidiary of SES Holdings, (the “LLC Merger”).
29
At the effective time of the Corporate Merger (the “Corporate Merger Effective Time”), subject to certain exceptions, (x) each share of Rockwater’s Class A common stock, $0.01 par value per share (“Rockwater Class A Common Stock”), then outstanding was converted into the right to receive a number of shares of Select Class A Common Stock equal to 0.7652 per each such share (the “Exchange Ratio”), (y) each share of Rockwater’s Class A-1 common stock, $0.01 par value per share, then outstanding was converted into the right to receive a number of shares of the Company’s Class A-2 common stock, par value $0.01 per share (“Select Class A-2 Common Stock”), equal to the Exchange Ratio, and (z) each share of Rockwater’s Class B common stock, $0.01 par value per share, then outstanding was converted into the right to receive a number of shares of Select Class B Common Stock equal to the Exchange Ratio. At the effective time of the LLC Merger (the “LLC Merger Effective Time”), subject to certain exceptions, each unit of RES Holdings (each, an “RES Holdings Unit”) then outstanding (including RES Holdings Units held by Rockwater) was converted into the right to receive a number of units in SES Holdings equal to the Exchange Ratio. The original exchange ratio of 0.7777 set forth in the Merger Agreement was adjusted downwards to 0.7652 in accordance with the terms of the Merger Agreement.
Shares of the Company’s common stock outstanding immediately prior to the Corporate Merger Effective Time remain outstanding and have not been exchanged, converted or otherwise changed in the Corporate Merger. Based on the number of shares of Rockwater common stock issued and outstanding immediately prior to the Corporate Merger Effective Time, a total of approximately 25.9 million shares of Select Class A Common Stock, 6.7 million shares of Select Class A-2 Common Stock and 4.4 million shares of Select Class B Common Stock (excluding the issuance of equity awards, which are described in the following paragraph), were issued to the former holders of Rockwater common stock pursuant to the Merger Agreement. In the aggregate (including the issuance of equity awards), the Company issued approximately 37.3 million shares of common stock. Units in SES Holdings outstanding immediately prior to the LLC Merger Effective Time remain outstanding and have not been exchanged, converted or otherwise changed in the LLC Merger. Based on the number of RES Holdings Units issued and outstanding immediately prior to the LLC Merger Effective Time, a total of approximately 37.3 million units in SES Holdings were issued to the former holders of RES Holdings Units pursuant to the Merger Agreement.
At the Corporate Merger Effective Time, each outstanding option to purchase shares of Rockwater Class A Common Stock (each, a “Rockwater Stock Option”) was converted into an option to acquire, on the same terms and conditions as were applicable to such Rockwater Stock Option immediately prior to the Corporate Merger Effective Time, the number of shares of Select Class A Common Stock determined by multiplying the number of shares of Rockwater Class A Common Stock subject to such Rockwater Stock Option as of immediately prior to the Corporate Merger Effective Time by the Exchange Ratio, at an exercise price per share of Select Class A Common Stock equal to the exercise price per share of Rockwater Class A Common Stock under such Rockwater Stock Option divided by the Exchange Ratio (such conversions, collectively, the “Option Conversion”). Additionally, at the Corporate Merger Effective Time, each share of restricted Rockwater Class A Common Stock (each, a “Rockwater Restricted Stock Award”) that was outstanding immediately prior to the Corporate Merger Effective Time ceased to represent Rockwater Class A Common Stock and was converted into a new award of restricted shares, subject to the same terms and conditions as were applicable to such Rockwater Restricted Stock Award prior to the Corporate Merger Effective Time, equal to the number of shares of Select Class A Common Stock determined by multiplying the number of shares of Rockwater Class A Common Stock subject to such Rockwater Restricted Stock Award as of immediately prior to the Corporate Merger Effective Time by the Exchange Ratio (such conversions, collectively, the “Restricted Stock Conversion”). Subject to certain New York Stock Exchange (“NYSE”) restrictions, the shares available under the Rockwater Equity Plan as of the Corporate Merger Effective Time (as appropriately adjusted to reflect the Exchange Ratio) may be used for post-transaction grants under the 2016 Plan. The Option Conversion, Restricted Stock Conversion and assumption of shares available under the Rockwater Equity Plan described in the preceding sentences are collectively referred to as the “Equity Award Actions.” The Equity Plan Amendment, which was previously adopted to effectuate the Equity Award Actions, became effective on November 1, 2017 at the Corporate Merger Effective Time.
New Credit Agreement
On November 1, 2017, in connection with the closing of the transactions contemplated by the Merger Agreement (the “Closing”), SES Holdings and Select LLC (the “Borrower”) entered into a $300.0$270.0 million amended and restated senior secured sustainability-linked revolving credit facility (the “New“Sustainability-Linked Credit Agreement”Facility”), by and among SES Holdings, as parent, the Borrower,Select LLC, as borrower, and certain of
30
SES Holdings’sHoldings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”). The New (which amended and restated the Credit Agreement dated November 1, 2017 by and among SES Holdings, as parent, Select LLC, as borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and the Administrative Agent (the “Prior Credit Agreement”)). Refer to “Note 10—Debt” in the Company’s Annual Report on Form 10-K for a discussion of the Prior Credit Agreement. The Sustainability-Linked Credit Facility also has a sublimit of $40.0 million for letters of credit and a sublimit of $30.0$27.0 million for swingline loans.loans, respectively. Subject to obtaining commitments from existing or new lenders, the CompanySelect LLC has the option to increase the maximum amount under the senior secured credit facility by $150.0$135.0 million during the first three years following the Closing.Restatement Date.
The NewSustainability-Linked Credit AgreementFacility permits extensions of credit up to the lesser of $300.0$270.0 million and a borrowing base that is determined by calculating the amount equal to the sum of (i) 85% of the Eligible Billed Receivables (as defined in the NewSustainability-Linked Credit Agreement)Facility), plus (ii) 75% of Eligible Unbilled Receivables (as defined in the NewSustainability-Linked Credit Agreement)Facility), provided that this amount will not equal more than 35% of the borrowing base, plus (iii) the lesser of (A) the product of 70% multiplied by the value of Eligible Inventory (as defined in the NewSustainability-Linked Credit Agreement)Facility) at such time and (B) the product of 85% multiplied by the Net Recovery Percentage (as defined in the NewSustainability-Linked Credit Agreement)Facility) identified in the most recent Acceptable Appraisal of Inventory (as defined in the NewSustainability-Linked Credit Agreement)Facility), multiplied by the value of Eligible Inventory at such time, provided that this amount will not equal more than 30% of the borrowing base, minus (iv) the aggregate amount of Reserves (as defined in the NewSustainability-Linked Credit Agreement)Facility), if any, established by the Administrative Agent from time to time, including, if any, the amount of the Dilution Reserve (as defined in the NewSustainability-Linked Credit Agreement)Facility). The borrowing base is calculated on a monthly basis pursuant to a borrowing base certificate delivered by the BorrowerSelect LLC to the Administrative Agent.
Borrowings under the NewSustainability-Linked Credit AgreementFacility bear interest, at the Borrower’sSelect LLC’s election, at either the (a) one-, two-, three- or six-month LIBOR (“Eurocurrency Rate”)three-month Term SOFR (as defined in the Sustainability-Linked Credit Facility) or (b) the greatest of (i) the federal funds rate plus ½%0.5%, (ii) the one-month Eurocurrency RateTerm SOFR plus 1% and (iii) the Administrative Agent’s prime rate (the “Base Rate”), in each case plus an applicable margin, and interest shall be payable monthly in arrears. The applicable margin for Eurocurrency RateTerm SOFR loans ranges from 1.50%1.75% to 2.00%2.25% and the applicable margin for Base Rate loans ranges from 0.50%0.75% to 1.00%1.25%, in each case, depending on the Borrower’sSelect LLC’s average excess availability under the NewSustainability-Linked Credit Agreement. The applicable margin for Eurocurrency Rate loans will be 1.75% andFacility, as set forth in the applicable margin for Base Rate loans will be 0.75% until June 30, 2018.table below. During the continuance of a bankruptcy event of default, automatically, and during the continuance of any other default, upon the Administrative Agent’s or the required lenders’ election, all outstanding amounts under the NewSustainability-Linked Credit AgreementFacility will bear interest at 2.00% plus the otherwise applicable interest rate. The NewSustainability-Linked Credit AgreementFacility is scheduled to mature on the fifth anniversary of the Closing.Restatement Date.
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| | | | | | |
Level | | Average Excess Availability | | Base Rate Margin | | SOFR Margin |
| | | | | | |
I | | < 33.33% of the commitments | | 1.25% | | 2.25% |
II | | < 66.67% of the commitments and ≥ 33.33% of the commitments | | 1.00% | | 2.00% |
III | | ≥ 66.67% of the commitments | | 0.75% | | 1.75% |
| | | | |
Level | | Average Revolver Usage | | Unused Line Fee Percentage |
| | | | |
I | | ≥ 50% of the commitments | | 0.250% |
II | | < 50% of the commitments | | 0.375% |
Under the Sustainability-Linked Credit Facility, the interest rate margin and the facility fee rates are also subject to adjustments based on Select LLC’s performance of specified sustainability target thresholds with respect to (i) total recordable incident rate, as the Employee Health and Safety Metric and (ii) barrels of produced water recycled at permanent or semi-permanent water treatment and recycling facilities owned or operated, as the Water Stewardship Metric, in each case, subject to limited assurance verification by a qualified independent external reviewer. The adjustment for the interest rate margin is a range of plus and minus 5.0 basis points and the adjustment for the fee margin is a range of plus and minus 1.0 basis point, subject to the mechanics under the Sustainability-Linked Credit Facility.
The obligations under the NewSustainability-Linked Credit AgreementFacility are guaranteed by SES Holdings and certain of the subsidiaries of SES Holdings and the BorrowerSelect LLC and secured by a security interest in substantially all of the personal property assets of SES Holdings, the BorrowerSelect LLC and their domestic subsidiaries.
The NewSustainability-Linked Credit AgreementFacility contains certain customary representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the NewSustainability-Linked Credit AgreementFacility to be immediately due and payable.
In addition, the NewSustainability-Linked Credit AgreementFacility restricts SES Holdings’sHoldings’ and the Borrower’sSelect LLC’s ability to make distributions on, or redeem or repurchase, its equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the NewSustainability-Linked Credit AgreementFacility and either (a) excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 25% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $37.5$33.75 million or (b) if SES Holdings’sHoldings’ fixed charge coverage ratio is at least 1.0 to 1.0 on a pro forma basis, and excess availability at all times during the preceding 30 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 20% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $30.0$27.0 million. Additionally, the NewSustainability-Linked Credit AgreementFacility generally permits the BorrowerSelect LLC to make distributions required under its existing tax receivable agreements.Tax Receivable Agreements. See “Note 12—Related Party Transactions—Tax Receivable Agreements” for further discussion of the Tax Receivable Agreements.
The NewSustainability-Linked Credit AgreementFacility also requires SES Holdings to maintain a fixed charge coverage ratio of at least 1.0 to [1.0]1.0 at any time availability under the NewSustainability-Linked Credit AgreementFacility is less than the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million and continuing through
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and including the first day after such time that availability under the NewSustainability-Linked Credit AgreementFacility has equaled or exceeded the greater of (i) 10% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (ii) $15.0 million for 60 consecutive calendar days.
Certain lenders party to the New Credit Agreement and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments.
Termination of Credit Facility
In connection with the entry into the New Credit Agreement, the obligations of SES Holdings and the Borrower under the Credit Facility were repaid in full and the Credit Facility was terminated.
Certain lenders party to theSustainability-Linked Credit Facility and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company and its affiliates in the ordinary course of business for which they have received and would receive customary compensation. In addition, in the ordinary course of their various business activities, such parties and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for
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the accounts of their customers, and such investments and securities activities may involve the Company’s securities and/or instruments.
The Company had 0 borrowings outstanding under the Sustainability-Linked Credit Facility as of June 30, 2022 and 0 borrowings outstanding under the Prior Credit Agreement as of December 31, 2021. As of June 30, 2022 and December 31, 2021, the borrowing base under the Sustainability-Linked Credit Facility and Prior Credit Agreement was $216.5 million and $132.7 million, respectively.The borrowing capacity under the Sustainability-Linked Credit Facility and Prior Credit Agreement was reduced by outstanding letters of credit of $20.9 million and $15.6 million as of June 30, 2022 and December 31, 2021, respectively. The Company’s letters of credit have a variable interest rate between 1.75% and 2.25% based on the Company’s average excess availability as outlined above. The unused portion of the available borrowings under the Sustainability-Linked Credit Facility was $195.6 million as of June 30, 2022.
In addition, certain lenders partyconnection with the entry into the Sustainability-Linked Credit Facility, the Company incurred $0.1 million and $2.1 million of debt issuance costs during the Current Quarter and Current Period, respectively. Debt issuance costs are amortized to interest expense over the life of the debt to which they pertain. Total unamortized debt issuance costs as of June 30, 2022 and December 31, 2021, were $2.3 million and $0.6 million, respectively. As these debt issuance costs relate to a revolving line of credit, they are presented as a deferred charge within other assets on the consolidated balance sheets. Amortization expense related to debt issuance costs was $0.1 million, $0.2 million, $0.4million and $0.3 million for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
The Company was in compliance with all debt covenants as of June 30, 2022.
NOTE 9—COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to a number of lawsuits and claims arising out of the normal conduct of its business. The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. Based on a consideration of all relevant facts and circumstances, including applicable insurance coverage, it is not expected that the ultimate outcome of any currently pending lawsuits or claims against the Company will have a material adverse effect on its consolidated financial position, results of operations or cash flows; however, there can be no assurance as to the Credit Facilityultimate outcome of these matters.
Retentions
We are lendersself-insured up to certain retention limits with respect to workers’ compensation, general liability and vehicle liability matters, and health insurance. We maintain accruals for self-insurance retentions that we estimate using third-party data and claims history.
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NOTE 10—EQUITY-BASED COMPENSATION
The SES Holdings 2011 Equity Incentive Plan (the “2011 Plan”) was approved by the board of managers of SES Holdings in April 2011. In conjunction with the private placement of 16,100,000 shares of the Company’s Class A Common Stock on December 20, 2016 (the “Select 144A Offering”), the Company adopted the Select Energy Services, Inc. 2016 Equity Incentive Plan (as amended, the “2016 Plan”) for employees, consultants and directors of the Company and its affiliates. Options that were outstanding under the New Credit2011 Plan immediately prior to the Select 144A Offering were cancelled in exchange for new options granted under the 2016 Plan. On May 8, 2020, the Company’s stockholders approved an amendment to the 2016 Plan to increase the number of shares of the Company’s Class A Common Stock that may be issued under the 2016 Plan by 4,000,000 shares and to make certain other administrative changes. The 2016 Plan includes share recycling provisions that allow shares subject to an award that are withheld or surrendered to the Company in payment of any exercise price or taxes or an award that expires or is cancelled, forfeited or otherwise terminated without actual delivery of the underlying shares of Class A Common Stock to be considered not delivered and thus available to be granted as new awards under the 2016 Plan.
Currently, the maximum number of shares reserved for issuance under the 2016 Plan is approximately 13.3 million shares, with approximately 2.6 million shares available to be issued as of June 30, 2022. For all share-based compensation award types, the Company accounts for forfeitures as they occur.
Stock Option Awards
The Company has outstanding stock option awards as of June 30, 2022 but there have been 0 option grants since 2018. The stock options were granted with an exercise price equal to or greater than the fair market value of a share of Class A Common Stock as of the date of grant. The expected life of the options at the time of the grant was based on the vesting period and term of the options awarded, which was ten years.
A summary of the Company’s stock option activity and related information as of and for the Current Period is as follows:
| | | | | | | | | | |
| | For the six months ended June 30, 2022 | ||||||||
| | | | | | | Weighted-average | | | |
| | | | Weighted-average | | Grant Date Value | | Aggregate Intrinsic | ||
|
| Stock Options |
| Exercise Price |
| Term (Years) |
| Value (in thousands) (a) | ||
Beginning balance, outstanding |
| 2,074,216 | | $ | 16.89 | | 4.4 | | $ | — |
Exercised | | (70,000) | | | 8.70 | | | | | |
Forfeited |
| (9,411) | | | 20.00 | | | | | |
Expired | | (148,227) | | | 20.17 | | | | | |
Ending balance, outstanding |
| 1,846,578 | | $ | 16.92 | | 4.2 | | $ | — |
Ending balance, exercisable | | 1,846,578 | | $ | 16.92 | | 4.2 | | $ | — |
Nonvested as of June 30, 2022 | | — | | $ | — | | | | | |
(a)Aggregate intrinsic value for stock options is based on the difference between the exercise price of the stock options and the quoted closing Class A Common Stock price of $6.82 and $6.23 as of June 30, 2022 and December 31, 2021, respectively.
The Company recognized 0 compensation expense related to stock options during the Current Quarter, Prior Quarter or Current Period and a nominal amount of compensation expense during the Prior Period. As of June 30, 2022, all equity-based compensation expense related to stock options had been recognized.
Restricted Stock Awards
The value of the restricted stock awards granted was established by the market price of the Class A Common Stock on the date of grant and is recorded as compensation expense ratably over the vesting term, which is generally one
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to three years from the applicable date of grant. The Company recognized compensation expense of $3.9 million, $2.1 million, $6.7 million and $3.1 million related to the restricted stock awards for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively. As of June 30, 2022, there was $24.3 million of unrecognized compensation expense with a weighted-average remaining life of 1.9 years related to unvested restricted stock awards.
A summary of the Company’s restricted stock awards activity and related information for the Current Period is as follows:
| | | | | |
| | For the six months ended June 30, 2022 | |||
| | | | Weighted-average | |
|
| Restricted Stock Awards |
| Grant Date Fair Value | |
Nonvested as of December 31, 2021 | | 3,144,513 | | $ | 6.35 |
Granted | | 2,529,231 | | | 8.13 |
Vested | | (1,386,021) | | | 7.02 |
Forfeited | | (63,118) | | | 7.16 |
Nonvested as of June 30, 2022 | | 4,224,605 | | $ | 7.19 |
Performance Share Units (PSUs)
During 2020, 2021 and 2022, the Company approved grants of PSUs that are subject to both performance-based and service-based vesting provisions related to (i) return on asset performance (“ROA”) in comparison to thirteen peer companies and (ii) Adjusted Free Cash Flow (“FCF”) performance percentage. The number of shares of Class A Common Stock issued to a recipient upon vesting of the PSUs will be calculated based on ROA and FCF performance over the applicable period from either January 1, 2020 through December 31, 2022, January 1, 2021 through December 31, 2023 or January 1, 2022 through December 31, 2024.
During 2021, the Company also approved grants of PSUs subject to both performance-based and service-based vesting conditions based on adjusted earnings before taxes and depreciation (“Adjusted EBITDA”) as defined in the agreement. The target PSUs granted in 2021 connected with Adjusted EBITDA could vest at 100% only if the minimum Adjusted EBITDA threshold was met. All Adjusted EBITDA-linked PSUs granted in 2021 did not achieve the performance-based vesting conditions and were forfeited.
The target number of shares of Class A Common Stock subject to each remaining PSU granted in 2020, 2021 and 2022 is 1; however, based on the achievement of performance criteria, the number of shares of Class A Common Stock that may be received in settlement of each PSU can range from 0 to 1.75 times the target number. The PSUs become earned at the end of the performance period after the attainment of the performance level has been certified by the compensation committee, which will be no later than June 30, 2023 for the 2020 PSU grants, June 30, 2024 for the 2021 PSU grants, and June 30, 2025, for the 2022 PSU grants, assuming the applicable minimum performance metrics are achieved.
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The target PSUs granted in 2020 that become earned connected with the ROA in comparison to other companies will be determined based on the Company’s Average Return on Assets (as defined in the applicable PSU agreement) relative to the Average Return on Assets of the peer companies (as defined in the applicable PSU agreement) in accordance with the following table, but only if the Company’s Average Return on Assets is equal to or greater than 5% during the performance period. The target PSUs granted in 2021 and 2022 removed the 5% minimum ROA for the Company and added that the Company must have a positive Total Shareholder Return (as defined in the applicable PSU agreement) over the performance period. As a result of this market condition being added, the 2021 and 2022 PSUs will be valued each reporting period utilizing a Black-Scholes model.
| | |
Ranking Among Peer Group | | Percentage of Target Amount Earned |
Outside of Top 10 | | 0% |
Top 10 | | 50% |
Top 7 | | 100% |
Top 3 | | 175% |
The target PSUs that become earned in connection with the adjusted FCF performance percentage will be determined (as defined in the applicable PSU agreement) in accordance with the following table:
| | |
Adjusted FCF Performance Percentage | | Percentage of Target Amount Earned |
Less than 70% | | 0% |
70% | | 50% |
100% | | 100% |
130% | | 175% |
The fair value on the date the PSUs were granted during 2022, 2021 and 2020 was $5.0 million, $4.4 million and $4.4 million, respectively. Compensation expense related to the PSUs is determined by multiplying the number of shares of Class A Common Stock underlying such awards that, based on the Company’s estimate, are probable to vest by the measurement date (i.e., the last day of each reporting period date) fair value and recognized using the accelerated attribution method. The Company recognized compensation expense of $0.1 million, $0.4 million, $0.6 million and $0.9 million related to the PSUs for the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
As of June 30, 2022, the unrecognized compensation cost related to our unvested PSUs is estimated to be $5.5 million and is expected to be recognized over a weighted-average period of 2.1years. However, this compensation cost will be adjusted as appropriate throughout the applicable performance periods.
The following table summarizes the information about the PSUs outstanding as of June 30, 2022:
| | |
| PSUs | |
Nonvested as of December 31, 2021 | | 2,205,604 |
Target shares granted | | 665,992 |
Target shares forfeited (1) | | (838,384) |
Target shares outstanding as of June 30, 2022 | | 2,033,212 |
(1) | All PSUs granted in 2019 and all PSUs granted in 2021 tied to Adjusted EBITDA did not achieve the respective performance targets and were forfeited. |
Employee Stock Purchase Plan (ESPP)
The Company has an Employee Stock Purchase Plan (“ESPP”) under which employees that have been continuously employed for at least one year may purchase shares of Class A Common Stock at a discount. The plan provides for four offering periods per year for purchases: December 1 through February 28, March 1 through May 31, June 1 through August 31 and September 1 through November 30. At the end of each offering period, enrolled employees purchase shares of Class A Common Stock at a price equal to 95% of the market value of the stock on the last
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day of such offering period. The purchases are made at the end of an offering period with funds accumulated through payroll deductions over the course of the offering period. Subject to limitations set forth in the plan and under IRS regulations, eligible employees may elect to contribute a maximum of $15,000 to the plan in a single calendar year. The plan is deemed to be noncompensatory.
The following table summarizes ESPP activity (in thousands, except shares):
| | | |
| | For the six months ended | |
|
| June 30, 2022 | |
Cash received for shares issued | | $ | 25 |
Shares issued | | | 3,140 |
Share Repurchases
During the Current Quarter, the Company repurchased 94,595 shares of Class A Common Stock in connection with employee minimum tax withholding requirements for units vested under the 2016 Plan. All repurchased shares were retired. During the Current Quarter, the repurchases were accounted for as a decrease to paid-in-capital of $0.8 million and a decrease to Class A Common Stock of approximately $1,000. In the Prior Quarter, the Company repurchased 55,898 shares in connection with employee minimum tax withholding requirements.
During the Current Period, the Company repurchased 2,297,985 shares of Class A Common Stock in the open market and repurchased 456,938 shares of Class A Common Stock in connection with employee minimum tax withholding requirements for units vested under the 2016 Plan and the cashless exercise of stock options. All repurchased shares were retired. During the Current Period, the repurchases were accounted for as a decrease to paid-in-capital of $20.3 million and a decrease to Class A Common Stock of approximately $28,000. In the Prior Period, the Company repurchased 199,976 shares in connection with employee minimum tax withholding requirements.
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NOTE 11—FAIR VALUE MEASUREMENT
The Company utilizes fair value measurements to measure assets and liabilities in a business combination or assess impairment and abandonment of property and equipment, intangible assets and goodwill or to measure the value of securities marked to market. Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in an orderly transaction between market participants at the measurement date. Further, ASC 820, Fair Value Measurements, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and includes certain disclosure requirements. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk.
ASC 820 establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1—Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Quoted prices for similar assets or liabilities in non-active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs that are unobservable and significant to the fair value measurement (including the Company’s own assumptions in determining fair value).
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were 0 transfers into, or out of, the three levels of the fair value hierarchy for the six months ended June 30, 2022 or the year ended December 31, 2021.
Nonmonetary transaction:During 2020, the Company had a nonmonetary exchange with a customer whereby the customer settled an accounts receivable balance using its restricted common stock, warrants and other privately traded securities. The Company chose the fair value option to account for the securities because it represents the period-end value of the securities, which the Company has the ability to sell. The registration statement registering the resale of the restricted common stock, warrants and other privately traded securities received became effective in the fourth quarter of 2020. Accordingly, the Company uses a Level 1 calculation with the value of the securities derived from quoted market pricing of unrestricted, publicly-traded securities. The Company recorded 0, a $0.7 million unrealized gain, less than a $0.1 million unrealized loss and a $1.2 million unrealized loss on the securities during the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively, based on the value of the securities as of the end of each reporting period, recognized within other income (expense), net on the accompanying consolidated statements of operations. The Company sold most of these securities during 2021. The approximately $35,000 of remaining securities is included in prepaid expenses and other current assets on the accompanying consolidated balance sheets as of June 30, 2022.
Other fair value considerations
The carrying values of the Company’s current financial instruments, which include cash and cash equivalents, accounts receivable trade and accounts payable, approximate their fair value as of June 30, 2022 and December 31, 2021, due to the short-term nature of these instruments. The Company did not have any bank debt as of June 30, 2022 or December 31, 2021. The estimated fair values of the Company’s financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.
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NOTE 12—RELATED-PARTY TRANSACTIONS
The Company considers its related parties to be those stockholders who are beneficial owners of more than 5.0% of its common stock, executive officers, members of its board of directors or immediate family members of any of the foregoing persons, an investment in a company that is significantly influenced by another related party, and cost-method and equity-method investees. The Company has entered into a number of transactions with related parties. In accordance with the Company’s related persons transactions policy, the audit committee of the Company’s board of directors regularly reviews these transactions. However, the Company’s results of operations may have been different if these transactions were conducted with non-related parties.
During the Current Quarter, sales to related parties were $0.8 million and purchases from related-party vendors were $2.9 million. These purchases consisted of $2.4 million relating to the rental of certain equipment or other services used in operations, $0.3 million relating to management, consulting and other services and $0.2 million relating to property and equipment, inventory and consumables.
During the Prior Quarter, sales to related parties were $0.3 million and purchases from related-party vendors were $2.4 million. These purchases consisted of $1.5 million relating to the rental of certain equipment or other services used in operations, $0.8 million relating to management, consulting and other services and $0.1 million relating to purchases of property and equipment.
During the Current Period, sales to related parties were $1.1 million and purchases from related-party vendors were $5.5 million. These purchases consisted of $4.6 million relating to the rental of certain equipment or other services used in operations, $0.6 million relating to management, consulting and other services and $0.3 million relating to property and equipment, inventory and consumables.
During the Prior Period, sales to related parties were $0.6 million and purchases from related-party vendors were $3.5 million. These purchases consisted of $2.4 million relating to the rental of certain equipment or other services used in operations, $1.0 million relating to management, consulting and other services and $0.1 million relating to purchases of property and equipment.
Tax Receivable Agreements
In connection with the Select 144A Offering, the Company entered into two tax receivable agreements (the “Tax Receivable Agreements”) with Legacy Owner Holdco and certain other affiliates of the then holders of SES Holdings LLC Units (each such person and any permitted transferee thereof, a “TRA Holder,” and together, the “TRA Holders”).
The first of the Tax Receivable Agreements, which the Company entered into with Legacy Owner Holdco and Crestview Partners II GP, L.P. (“Crestview GP”), generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s SES Holdings LLC Units in connection with the Select 144A Offering or pursuant to the exercise of the Exchange Right or the Company’s Call Right and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under such Tax Receivable Agreement.
The second of the Tax Receivable Agreements, which the Company entered into with an affiliate of Legacy Owner Holdco and Crestview GP, generally provides for the payment by the Company to such TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in periods after the Select 144A Offering as a result of, as applicable to each such TRA Holder, (i) any net
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operating losses available to the Company as a result of certain reorganization transactions entered into in connection with the Select 144A Offering and (ii) imputed interest deemed to be paid by the Company as a result of any payments the Company makes under such Tax Receivable Agreement.
The Company has not recognized a liability associated with the Tax Receivable Agreements as of June 30, 2022 or December 31, 2021.
NOTE 13—INCOME TAXES
The Company’s income tax information is presented in the table below. The effective tax rate is different than the 21% standard Federal rate due to net income allocated to noncontrolling interests, state income taxes and valuation allowances.
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
| | (in thousands) | ||||||||||
Current income tax expense (benefit) | | $ | 204 | | $ | 12 | | $ | 445 | | $ | (185) |
Deferred income tax (benefit) expense | | | (22) | | | 72 | | | (49) | | | 6 |
Total income tax expense (benefit) | | $ | 182 | | $ | 84 | | $ | 396 | | $ | (179) |
Effective Tax Rate | | | 1.2% | | | (0.4)% | | | 1.7% | | | 0.4% |
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NOTE 14—NONCONTROLLING INTERESTS
The Company’s noncontrolling interests fall into two categories as follows:
● | Noncontrolling interests attributable to joint ventures formed for water-related services. |
● | Noncontrolling interests attributable to holders of Class B Common Stock. |
| | | | | | | | |
| | | As of | | As of | | ||
|
| | June 30, 2022 |
| December 31, 2021 | | ||
| | | (in thousands) | | ||||
Noncontrolling interests attributable to joint ventures formed for water-related services | | | $ | 1,161 |
| $ | 1,091 | |
Noncontrolling interests attributable to holders of Class B Common Stock | | | | 104,941 |
|
| 101,987 | |
Total noncontrolling interests | | | $ | 106,102 |
| $ | 103,078 | |
During the Prior Period, the Company initiated the dissolution of one of its water-related services joint ventures and increased its ownership interest in another joint venture, which, combined, eliminated $0.9 million of noncontrolling interest. Additionally, for all periods presented, there were changes in Select Inc.’s ownership interest in SES Holdings LLC. The effects of the changes in Select Inc.’s ownership interest in SES Holdings LLC are as follows:
| | | | | | |
| | Six months ended June 30, | ||||
|
| 2022 |
| 2021 | ||
| | (in thousands) | ||||
Net income (loss) attributable to Select Energy Services, Inc. | | $ | 19,305 |
| $ | (39,674) |
Transfers from (to) noncontrolling interests: | | | |
|
|
|
Decrease in additional paid-in capital as a result of issuing shares for business combinations | | | (1,356) |
|
| — |
Decrease in additional paid-in capital as a result of stock option exercises | |
| (24) |
|
| — |
Increase in additional paid-in capital as a result of restricted stock issuance, net of forfeitures | |
| 2,188 |
|
| 1,582 |
Increase (decrease) in additional paid-in capital as a result of the repurchase of SES Holdings LLC Units | |
| 436 |
|
| (19) |
(Decrease) increase in additional paid-in capital as a result of the Employee Stock Purchase Plan shares issued | | | (1) | | | 1 |
Change to equity from net income (loss) attributable to Select Energy Services, Inc. and transfers from noncontrolling interests | | $ | 20,548 |
| $ | (38,110) |
34
NOTE 15—INCOME (LOSS) PER SHARE
Income (loss) per share is based on the amount of loss allocated to the stockholders and the weighted-average number of shares outstanding during the period for each class of common stock. Outstanding options to purchase 1,846,578, 2,132,690, 1,846,578 and 2,132,690 shares of Class A Common Stock are not included in the calculation of diluted weighted-average shares outstanding for the Current Quarter, Prior Quarter, Current Period and Prior Period respectively, as their effect is antidilutive.
The following tables present the Company’s calculation of basic and diluted loss per share for the Current and Prior Quarter and the Current and Prior Period (dollars in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2022 | | Three months ended June 30, 2021 | ||||||||||||||
| | Select Energy | | | | | | | | Select Energy | | | | | | | ||
|
| Services, Inc. |
| Class A |
| Class B |
| Services, Inc. |
| Class A |
| Class B | ||||||
Numerator: | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 14,581 | | | | | | | | $ | (19,615) | | | | | | |
Net (income) loss attributable to noncontrolling interests | | | (2,078) | | | | | | | | | 3,048 | | | | | | |
Net income (loss) attributable to Select Energy Services, Inc. — basic | | $ | 12,503 | | $ | 12,503 | | $ | — | | $ | (16,567) | | $ | (16,567) | | $ | — |
Add: Reallocation of net income (loss) attributable to noncontrolling interests for the dilutive effect of restricted stock | | | 18 | | | 18 | | | — | | | — | | | — | | | — |
Add: Reallocation of net income (loss) attributable to noncontrolling interests for the dilutive effect of performance units | | | 12 | | | 12 | | | — | | | — | | | — | | | — |
Net income (loss) attributable to Select Energy Services, Inc. — diluted | | $ | 12,533 | | $ | 12,533 | | $ | — | | $ | (16,567) | | $ | (16,567) | | $ | — |
Denominator: | | | | | | | | | | | | | | | | | | |
Weighted-average shares of common stock outstanding — basic | | | | | | 93,833,504 | | | 16,221,101 | | | | | | 85,244,439 | | | 16,221,101 |
Dilutive effect of restricted stock | | | | | | 904,023 | | | — | | | | | | — | | | — |
Dilutive effect of performance share units | | | | | | 618,282 | | | — | | | | | | — | | | — |
Dilutive effect of ESPP | | | | | | 80 | | | — | | | | | | — | | | — |
Weighted-average shares of common stock outstanding — diluted | | | | | | 95,355,889 | | | 16,221,101 | | | | | | 85,244,439 | | | 16,221,101 |
Income (loss) per share: | | | | | | | | | | | | | | | | | | |
Basic | | | | | $ | 0.13 | | $ | — | | | | | $ | (0.19) | | $ | — |
Diluted | | | | | $ | 0.13 | | $ | — | | | | | $ | (0.19) | | $ | — |
| | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2022 | | Six months ended June 30, 2021 | ||||||||||||||
| | Select Energy | | | | | | | | Select Energy | | | | | | | ||
|
| Services, Inc. |
| Class A |
| Class B |
| Services, Inc. |
| Class A |
| Class B | ||||||
Numerator: | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 22,566 | | | | | | | | $ | (47,036) | | | | | | |
Net (income) loss attributable to noncontrolling interests | | | (3,261) | | | | | | | | | 7,362 | | | | | | |
Net income (loss) attributable to Select Energy Services, Inc. — basic | | $ | 19,305 | | $ | 19,305 | | $ | — | | | (39,674) | | $ | (39,674) | | $ | — |
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of restricted stock | | | 34 | | | 34 | | | — | | | — | | | — | | | — |
Add: Reallocation of net loss (income) attributable to noncontrolling interests for the dilutive effect of performance units | | | 18 | | | 18 | | | — | | | — | | | — | | | — |
Net income (loss) attributable to Select Energy Services, Inc. — diluted | | $ | 19,357 | | $ | 19,357 | | $ | — | | $ | (39,674) | | $ | (39,674) | | $ | — |
Denominator: | | | | | | | | | | | | | | | | | | |
Weighted-average shares of common stock outstanding — basic | | | | | | 92,833,593 | | | 16,221,101 | | | | | | 85,118,851 | | | 16,221,101 |
Dilutive effect of restricted stock | | | | | | 1,099,937 | | | — | | | | | | — | | | — |
Dilutive effect of performance share units | | | | | | 573,490 | | | — | | | | | | — | | | — |
Dilutive effect of ESPP | | | | | | 157 | | | — | | | | | | — | | | — |
Weighted-average shares of common stock outstanding — diluted | | | | | | 94,507,178 | | | 16,221,101 | | | | | | 85,118,851 | | | 16,221,101 |
Income (loss) per share: | | | | | | | | | | | | | | | | | | |
Basic | | | | | $ | 0.21 | | $ | — | | | | | $ | (0.47) | | $ | — |
Diluted | | | | | $ | 0.20 | | $ | — | | | | | $ | (0.47) | | $ | — |
35
NOTE 16—SEGMENT INFORMATION
Select Inc. is a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the U.S. The Company’s services are offered through 3 reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the CODM in deciding how to allocate resources and assess performance. The Company’s CODM assesses performance and allocates resources on the basis of the 3 reportable segments. Corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate or Other.
The Company’s CODM assesses performance and allocates resources on the basis of the following 3 reportable segments:
Water Services — The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business.
Water Infrastructure — The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions, and our produced water gathering systems and saltwater disposal wells, as well as solids disposal facilities, primarily serving E&P companies.
Oilfield Chemicals — The Oilfield Chemicals segment provides technical solutions and expertise related to chemical applications in the oil and gas industry. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, pipelines and well completions. We also have significant capabilities in supplying logistics for chemical applications. Given the breadth of chemicals and application expertise we provide, our customers range from pressure pumpers to major integrated and independent oil and gas producers. This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of water used in well completions.
Financial information by segment for the Current and Prior Quarter and the Current and Prior Period is as follows:
| | | | | | | | | | | | |
| | For the three months ended June 30, 2022 | ||||||||||
|
| | |
| Income |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 197,161 | | $ | 14,315 | | $ | 15,369 | | $ | 8,360 |
Water Infrastructure | | | 61,725 | | | 2,450 | | | 11,439 | | | 10,607 |
Oilfield Chemicals | | | 79,734 | | | 5,204 | | | 2,446 | | | 323 |
Other | | | — | | | (106) | | | — | | | — |
Eliminations | |
| (2,717) | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 21,863 | |
| | |
| |
Corporate | |
| — | |
| (13,584) | |
| 525 | |
| 1,515 |
Interest expense, net | |
| — | |
| (494) | |
| — | |
| — |
Bargain purchase gain | | | — | | | 5,607 | | | — | | | — |
Other income, net | |
| — | |
| 1,600 | |
| — | |
| — |
| | $ | 335,903 | | $ | 14,992 | | $ | 29,779 | | $ | 20,805 |
36
| | | | | | | | | | | | |
| | For the three months ended June 30, 2021 | ||||||||||
|
| | |
| (Loss) Income |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 77,230 | | $ | (9,902) | | $ | 12,339 | | $ | 2,704 |
Water Infrastructure | | | 33,330 | | | (885) | | | 6,446 | | | 5,122 |
Oilfield Chemicals | | | 51,467 | | | 1,225 | | | 2,234 | | | 639 |
Other | | | — | | | (3) | | | — | | | — |
Eliminations | |
| (910) | |
| — | |
| — | |
| — |
Loss from operations | |
| | |
| (9,565) | |
| | |
| |
Corporate | |
| — | |
| (8,808) | |
| 623 | |
| — |
Interest expense, net | |
| — | |
| (400) | |
| — | |
| — |
Other expense, net | |
| — | |
| (758) | |
| — | |
| — |
| | $ | 161,117 | | $ | (19,531) | | $ | 21,642 | | $ | 8,465 |
| | | | | | | | | | | | |
| | For the six months ended June 30, 2022 | ||||||||||
|
| | |
| Income |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 361,847 | | $ | 16,880 | | $ | 30,931 | | $ | 13,991 |
Water Infrastructure | | | 120,923 | | | 5,877 | | | 19,870 | | | 21,679 |
Oilfield Chemicals | | | 152,415 | | | 9,370 | | | 4,953 | | | 896 |
Other | | | — | | | (108) | | | — | | | — |
Eliminations | |
| (4,513) | |
| — | |
| — | |
| — |
Income from operations | |
| | |
| 32,019 | |
| | |
| |
Corporate | |
| — | |
| (28,031) | |
| 1,092 | |
| 2,504 |
Interest expense, net | |
| — | |
| (1,214) | |
| — | |
| — |
Bargain purchase gain | | | — | | | 17,041 | | | — | | | — |
Other income, net | |
| — | |
| 3,505 | |
| — | |
| — |
| | $ | 630,672 | | $ | 23,320 | | $ | 56,846 | | $ | 39,070 |
| | | | | | | | | | | | |
| | For the six months ended June 30, 2021 | ||||||||||
|
| | |
| (Loss) Income |
| Depreciation and |
| Capital | |||
| | Revenue | | before taxes | | Amortization | | Expenditures | ||||
| | (in thousands) | ||||||||||
Water Services | | $ | 143,947 | | $ | (23,212) | | $ | 25,393 | | $ | 2,973 |
Water Infrastructure | | | 71,135 | | | 772 | | | 12,701 | | | 9,582 |
Oilfield Chemicals | | | 93,279 | | | (252) | | | 4,574 | | | 1,200 |
Other | | | — | | | (16) | | | — | | | — |
Eliminations | |
| (3,502) | |
| — | |
| — | |
| — |
Loss from operations | |
| | |
| (22,708) | |
| | |
| |
Corporate | |
| — | |
| (20,709) | |
| 1,273 | |
| 1 |
Interest expense, net | |
| — | |
| (835) | |
| — | |
| — |
Other expense, net | |
| — | |
| (2,963) | |
| — | |
| — |
| | $ | 304,859 | | $ | (47,215) | | $ | 43,941 | | $ | 13,756 |
37
Total assets by segment as of June 30, 2022 and December 31, 2021, is as follows:
| | | | | | |
| | As of | | As of | ||
|
| June 30, 2022 |
| December 31, 2021 | ||
| | (in thousands) | ||||
Water Services | | $ | 549,298 | | $ | 533,071 |
Water Infrastructure |
| | 293,663 |
| | 229,803 |
Oilfield Chemicals |
| | 191,006 |
| | 180,732 |
Other | | | 9,861 | | | 6,586 |
| | $ | 1,043,828 | | $ | 950,192 |
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with theour consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the Final Prospectus.year ended December 31, 2021, filed with the Securities and Exchange Commission on February 23, 2022 (our “2021 Form 10-K”). This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under “Cautionary Note Regarding Forward-Looking Statements.”Statements” and other cautionary statements described under the heading “Risk Factors” included in our 2021 Form 10-K and this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements.
This discussion relates to the three and six months ended June 30, 2022 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2021 (the “Prior Quarter” and the “Prior Period”, respectively).
Overview
We are a leading provider of total watercomprehensive water-management and chemical solutions to the U.S. unconventional oil and gas industry. Within the major shale playsindustry in the United States we source(“U.S.”). We also develop, manufacture and transfer water (both by permanent pipeline and temporary pipe) prior to itsdeliver a full suite of chemical solutions for use in drilling and completion activities associated with hydraulic fracturing or “fracking,” which we collectively refer to as “pre-frac water services.” In most of our areas of operations, we provide complementary water-related services that support oil and gas well completion and production activities including containment, monitoring, treatment, flowback, hauling and disposal. Our services are necessary to establish and maintain productionoperations. As a leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oil and gas overoilfield water throughout the productive lifelifecycle of a horizontal well. WaterAdditionally, we believe that responsibly managing water resources through our operations to help conserve and related services are increasingly important as E&P companies have increasedprotect the complexity and completion intensity of horizontal wells (including the use of longer horizontal wellbore laterals, tighter spacing of frac stagesenvironment in the laterals and increased water and proppant use per foot of lateral)communities in orderwhich we operate is paramount to improve production and recovery of hydrocarbons. Historically, we have generatedour continued success.
Sustainability
Select is committed to implementing a substantial majoritycorporate strategy that supports the long-term viability of our revenues through providing total water solutions tobusiness model in a manner that focuses on our customers.people, our customers, the environment, and the communities in which we operate. We providebelieve this focus will help both us and our services to major integratedcustomers achieve their short-term and large E&P companies, who typically represent the largest producerslong-term environmental, social and governance (“ESG”) goals, help us attract and retain top talent, maintain community support in each of our areas of operations and further our efforts to generate stockholder returns. We believe our commitment to foster a culture of corporate responsibility is an important part of being a company with operations spanning the contiguous U.S. Further, we believe being a good corporate steward is strategic to our growth in the oil and gas industry and will better allow us to develop solutions that both address the needs of our customers and contribute to sustainable business practices. As a service company, we compete with other service providers based on various factors, including safety and operational performance, technological innovation, process efficiencies and reputational awareness. We believe there is a strong link between these corporate responsibility initiatives and our ability to provide value in our industry.
We are one of the few public companies whose primary focus is on the management of water and water logistics in the oil and gas development industry, with a focus on driving efficient, environmentally responsible and economic solutions that lower costs throughout the lifecycle of the well. We believe water is a valuable resource and seek to balance the long-term sustainability of this resource between the needs of the oil and gas industry as well as other industries and the general public. As a company, we continue to provide access to various sources of water as demanded by our customers and have significantly increased our focus on the recycling and reuse of produced water, as well as industrial water sources, to meet the industry’s water demand and align our operations with the goals of our customers. We have invested significantly in recent quarters in the development of fixed recycling facilities that support the advancement of commercialized produced water reuse solutions. By doing so, we strive to reduce both the amount of produced water being reinjected into SWDs and our usage of fresh water. We view our rather unique position as an opportunity to transform water management by leveraging our Oilfield Chemicals business to develop produced water management solutions that increase our customers’ ability to reuse this produced water and add value to their operations. By implementing our innovative approach to water solutions, Select has become a leader in recycling produced water to be used in well completions.
39
Our strong company culture values commitments to all stakeholders, and we aim to create a work environment that fosters a diverse and inclusive company culture. Additionally, we prioritize safety in our operations through rigorous training, structured protocols, incentives and awards programs and ongoing automation of our operations where appropriate. Our prioritization of safety includes a commitment to safeguarding the communities in which we operate
We believe that proper alignment of our management and our board of directors with our shareholders is critical to creating long-term value, including the alignment of management compensation and incentive structures and the active engagement of a diverse, experienced and independent board of directors.
Recent Developments
Between July 2021 and February 2022, Select completed five acquisitions. Collectively these acquisitions expanded our revenue base and service offerings with many of our key customers and increased our overall service offerings within multiple basins. Effectively integrating the acquired assets and operations is a major focus of ours for the remainder of 2022. Our integration and related efforts include, but are not limited to, increasing revenue through strategic market share gains, regional service line expansion, increased pricing, and achieving operational synergies. These operational synergies are expected to be realized by effectively connecting complementary assets with one another, pairing assets with related services, realizing cost synergies, and selling excess assets.
On February 23, 2022, the Company acquired Nuverra, an energy-focused environmental solutions company, providing environmental solutions, including the removal, treatment, recycling, transportation and disposal of restricted solids, fluids and hydrocarbons for exploration and production companies operating across the U.S., including in the Bakken, Haynesville, Marcellus and Utica Shales. With the Nuverra transaction, we added more than 300,000 barrels per day of permitted daily disposal capacity in Texas, Louisiana, North Dakota, Montana and Ohio. When combined with our existing assets and other recent acquisitions, this brings our company-wide permitted daily disposal capacity to approximately 2.5 million barrels per day.
The Complete Acquisition, Agua Libre and Basic Acquisition and HB Rentals Acquisition improved our financial results in the year ended December 31, 2021, as well as our competitive positioning in the water solutions market. These acquisitions strengthened our geographic footprint and provided access to employee expertise as well as opportunities to expand our growing water recycling business into new areas. The acquisitions also increased our market share and added multiple opportunities for future revenue and cost synergies.
In February 2022, Russia launched a large-scale invasion of Ukraine that has led to significant armed hostilities. As a result, the U.S., the United Kingdom, the member states of the European Union and other public and private actors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions, has contributed to significant increases and volatility in the prices for oil and natural gas, with the posted price for WTI reaching a high of $123.64 per barrel during the Current Period. Such volatility may lead to a more difficult investing and planning environment for us and our customers. While the near-term impact of these regions.events resulted in higher oil and gas prices in the Current Period, the geopolitical and macroeconomic consequences of this invasion and associated sanctions cannot be predicted, and such events, or any further hostilities in Ukraine or elsewhere, could severely impact the world economy and may adversely affect our financial condition.
While the ongoing effects of the COVID-19 pandemic on our operations have decreased in recent quarters, this pandemic has had a material negative impact on our financial results. While we have seen economic recovery and higher oil prices through the Current Quarter and the Current Period, such negative impact may continue well beyond the containment of the pandemic until global GDP levels, associated oil demand and resulting oilfield activity all fully rebound. While we have seen oilfield activity improve considerably and global inventories rapidly normalize with continued demand growth since the low point experienced in 2020, considerable uncertainty still remains. Even with this recent recovery however, we cannot provide assurance that our assumptions used to estimate our future financial results will be correct given the unpredictable nature of the current market environment after the recent elevated volatility in the demand for oil and demand for our services. As a consequence, our ability to accurately forecast our activity and profitability is uncertain.
40
The future magnitude and ultimate duration of the COVID-19 pandemic is also uncertain. Therefore, we cannot reliably estimate its impact on our business, financial condition or near- or longer-term financial or operational results with certainty. In this environment, the Company has planned for a range of scenarios and has taken a number of actions to decrease operating and capital expenses, and defer other expenses in accordance with the provisions of the CARES Act. To protect our workforce during the COVID-19 pandemic, we have taken steps to support our people who are affected by the virus, manage work-from-home scheduling as appropriate, limit on-site visitors, and monitor and consistently communicate with those who are required to be at a work location, while also providing these employees with additional personal protective equipment.
As a result of reduced oil inventories driven by the economic recovery and oil demand growth in much of the world, as well as supply uncertainties heightened by the Russia/Ukraine war, oil and gas prices increased notably in the Current Quarter as compared to the Prior Quarter. During the Current Quarter, the average spot price of West Texas Intermediate crude oil was $108.83versus an average price of $66.19 for the Prior Quarter. The average Henry Hub natural gas spot price during the Current Quarter was $7.48 versus an average of $2.94 for the Prior Quarter. These price levels are supportive of our customers’ drilling and completion programs in the major shale basins.
Many of our customers have demonstrated their resolve to manage their capital spending to within budgets and cash flow from operations and increase redemptions of debt and/or returns of capital to investors. Additionally, consolidation among our customers can disrupt our market in the near-term and the resulting demand for our services. Overall however, the financial health of the oil and gas industry and many of our customers specifically, as reflected in debt metrics, recent capital raises, and equity valuations, greatly improved over the year ended December 31, 2021 and in the beginning of 2022.
From an operational standpoint, many of the recent trends still apply to ongoing unconventional oil and gas development. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing fracturing efficiency and the use of lower-cost in-basin sand has decreased total costs for our customers. However, we note the continued efficiency gains in the well completions process can limit the days we spend on the wellsite and, therefore, negatively impact the total revenue opportunity for certain of our services utilizing day-rate pricing models.
This multi-well pad development, combined with recent upstream acreage consolidation and the growing trends around the reuse applications of produced water provides significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production lifecycle of wells. While these trends are most advanced in the Permian Basin, they are emerging in other basins as well.
The trend of increased use of produced water will require additional chemical treatment solutions, and we have a dedicated team of specialists focused every day on developing and deploying innovative water treatment and reuse services for our customers. Our FluidMatch™ design solutions enable our customers to economically use these alternative sources to optimize their fluid systems by providing water profiling and fluid assessment services working towards real time. This trend also supports more complex “on the fly” solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to provide advanced technology solutions. Ultimately, we intend to play an important role in the advancement of water and chemical solutions that are designed to meet the sustainability goals of key stakeholders.
Our water logistics, treatment, and chemical application expertise, in combination with advanced technology solutions, are applicable to other industries beyond oil and gas. We are working to further commercialize our services in other businesses through our industrial solutions group.
February 2021 Severe Weather
Severe winter weather in February 2021 negatively impacted our Prior Period results, equating to approximately one lost week of operations across most of our locations, with extended raw material shortages that
41
impacted our Oilfield Chemicals segment into March. We estimate that this negatively impacted Prior Period revenue by an amount ranging from $9 million to $12 million.
Our Segments
Our services are offered through three operatingreportable segments: (i) Water Solutions, AccommodationsServices; (ii) Water Infrastructure; and Rentals, and Wellsite Completion and Construction Services.(iii) Oilfield Chemicals.
| Water Services. The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business. |
● | Water |
● | Oilfield Chemicals. The Oilfield Chemicals segment provides technical solutions and expertise related to chemical applications in the oil and gas industry. We develop, manufacture and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, pipelines and well completions. We also have significant capabilities in supplying logistics for chemical applications. Given the breadth of chemicals and application expertise we provide, our |
|
|
|
|
How We Generate Revenue
We currently generate a significantthe majority of our revenue through our Water Solutions segment, specifically through the sourcing and transfer of water used in drilling and completion activitieswater-management services associated with hydraulic fracturing. We generatewell completions, provided through our Water Services and Water Infrastructure segments. The majority of this revenue is realized through customer agreements with fixed pricing terms but no guaranteed throughput amounts.
33
services is provided, generally at our customers’ sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, most of our water and water-related services are priced based on prevailing market conditions, giving due consideration to the specific requirements of the customer.
We also generate revenue by providing completion and specialty chemicals through our Accommodations and Rentals and Wellsite Completion and Construction Services segments which provide workforce accommodations, related rentals and a variety of wellsite completion and construction services, including wellsite construction, pipeline construction, field services and well services.Oilfield Chemicals segment. We invoice the majority of our clientsOilfield Chemicals customers for these services provided based on a per job basisthe quantity of chemicals used or pursuant to short-term contracts as the customer’scustomers’ needs arise.
Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, vehicle and equipment costs (including depreciation, repair, rental and maintenance and leasing costs), fuelraw materials and water sourcing costs and water sourcingfuel costs. Our fixed costs are relatively low and a large portionlow. Most of the costs we incur inof serving our businesscustomers are variable, i.e., they are incurred only incurred when we provide water and water-related services, or chemicals and chemical-related services to our customers.
Labor costs associated with our employees representand contract labor comprise the most significantlargest portion of our costs of ourdoing business. We incurred labor and labor-related costs of $54.8$112.1 million, $59.7 million, $216.0 million and $34.4$117.6 million for the three months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016,Prior Period, respectively. We incurred labor costs of $155.5 million and $104.0 million for the nine months ended September 30, 2017 and 2016, respectively. Our labor costs for the nine months ended September 30, 2017 included $12.5 million of non-recurring costs related to a payout on our phantom equity units and IPO success bonuses. The majority of our recurring labor costs are variable and dependent on the then-current market environment and are incurred only while we are providing water and water-relatedour operational services. We also incur costs to employ personnel to sell and supervise our services and perform
42
maintenance on our assets, which areis not directly tied to our level of business activity. We alsoAdditionally, we incur selling, general and administrative costs for compensation of our administrative personnel at our field sites and in our operational and corporate headquarters.headquarters, as well as for third-party support, licensing and services.
We incur significant vehicle and equipment costs in connection with the operation of our business,services we provide, including depreciation, repairrepairs and maintenance, rental and leasing costs. We incurred vehicle and equipment costs of $36.0$66.3 million, $35.8 million, $123.6 million and $26.2$70.6 million for the three months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016,Prior Period, respectively.
We incur raw material costs in manufacturing our chemical products, as well as for water that we source for our customers. We incurred equipmentraw material costs of $98.4$75.1 million, $45.5 million, $146.1 million and $84.5$90.5 million for the nine months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016,Prior Period, respectively. Our depreciation costs are expected to decline over the next few years as a result of recent impairments as well as the decline in our capital expenditures over the last three years, which will be partially offset by any future capital expenditures on depreciable assets.
FuelWe incur variable transportation costs associated with water transportation are a significant operating cost.our service lines, predominately fuel and freight. We incurred fuel and freight costs of $8.2$32.0 million, $13.1 million, $55.9 million and $4.6$23.9 million for the three months ended September 30, 2017Current Quarter, Prior Quarter, Current Period and 2016,Prior Period, respectively. We incurredRising fuel costs of $21.4 million and $12.1 million for the nine months ended September 30, 2017 and 2016, respectively. Fuel prices impact our transportation costs, which affect the pricing and demand offor our services and, have an impact ontherefore, our results of operations.
We incur water sourcing costs in connection with obtaining strategic and reliable water sources to provide repeatable water volumes to our customers. We incurred water sourcing costs of $9.7 million and $5.8 million for the three months ended September 30, 2017 and 2016, respectively. We incurred water sourcing costs of $23.8 million and $14.1 million for the nine months ended September 30, 2017 and 2016 respectively.
Public Company Expenses
General and administrative expenses related to being a publicly traded company include: Exchange Act reporting expenses; expenses associated with compliance with the Sarbanes‑Oxley Act of 2002; expenses associated with maintaining our listing on the NYSE; incremental independent auditor fees; incremental legal fees; investor relations expenses; registrar and transfer agent fees; incremental director and officer liability insurance costs; and director compensation. We expect that general and administrative expenses related to being a publicly traded company will increase in future periods. Costs incurred by us for corporate and other overhead expenses will be reimbursed by SES Holdings pursuant to the SES Holdings LLC Agreement.
34
How We Evaluate Our Operations
We use a variety of operational and financial metrics to assess our performance. Among other measures, management considers each of the following:
| Revenue; |
| Gross Profit; |
| Gross Margins; |
● | EBITDA; and |
| Adjusted EBITDA. |
Revenue
We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections.projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our operatingreportable segments to identify potential areas for improvement, as well as to determine whether segments aresegment performance is meeting management’s expectations.
Gross Profit
To measure our financial performance, we analyze our gross profit, which we define as revenues less direct operating expenses (including depreciation expense)and amortization expenses). We believe gross profit is a meaningful metric because it provides insight oninto profitability and the true operating performance based on the historical cost basis of our assets. We also compare gross profit to prior periods and across locationssegments to identify trends as well as underperforming locations.segments.
Gross Margins
Gross margins provide an important gauge of how effective we are at converting revenue into profits. This metric works in tandem with gross profit to ensure that we do not seek to increase gross profit at the expense of lower margins, nor pursue higher gross margins at the expense of declining gross profits. We track gross margins by segment
43
and service line and compare them across prior periods and across segments and service lines to identify trends as well as underperforming segments.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income,income/(loss), plus taxes, interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus/(minus)accounting principles generally accepted in the U.S. (“GAAP”), plus non-cash losses/(gains)losses on the sale of assets or subsidiaries, non-cashnonrecurring compensation expense, non-recurringnon-cash compensation expense, and nonrecurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities relatedfacilities-related exit and disposal related expenditures.disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus/(minus) losses/(gains) on unconsolidated entities less bargain purchase gains from business combinations. The adjustments to EBITDA are generally consistent with such adjustments described in our Sustainability-Linked Credit Facility. See “—Comparison of Non-GAAP Financial Measures”Measures—EBITDA and “Note Regarding Non-GAAP Financial Measures”Adjusted EBITDA” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Factors Affecting the Comparability of Our Results of Operations to Our Historical Results of Operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described below and those described in “—Recent Developments” above.
Acquisition Activity
As described above, we are continuously evaluating potential investments, particularly in water infrastructure and other water-related services and technology. To the extent we consummate acquisitions, any incremental revenues or expenses from such transactions are not included in our historical results of operations.
Between July 2021 and February 2022, we completed five acquisitions. Our historical financial statements for periods prior to the respective date each acquisition was completed do not include the results of operations of that acquisition. See “—Recent Developments” and “Note 3—Acquisitions” for a description of these transactions.
3544
Results of Operations
The following tables set forth selected financial and operating dataour results of operations for the periods indicated (all values are net to our interest unless indicated otherwise):presented, including revenue by segment.
Three Months Ended September 30, 2017Current Quarter Compared to the Three Months Ended September 30, 2016Prior Quarter
| | | | | | | | | | | | | | ||||||||||||
| | Three months ended June 30, | | Change |
| | |||||||||||||||||||
|
| 2022 |
| 2021 |
| Dollars |
| Percentage |
| | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three months ended September 30, |
| Change |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| Dollars |
| Percentage |
| |||||||||||||||
|
|
| (in thousands) |
|
|
|
|
|
| ||||||||||||||||
| | | (in thousands) | | | | | |
| | |||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
| | |
Water solutions |
| $ | 125,086 |
| $ | 60,975 |
| $ | 64,111 |
| 105.1 | % | |||||||||||||
Accommodations and rentals |
|
| 15,615 |
|
| 5,838 |
|
| 9,777 |
| 167.5 | % | |||||||||||||
Wellsite completion and construction services |
|
| 13,179 |
|
| 7,094 |
|
| 6,085 |
| 85.8 | % | |||||||||||||
Water Services | | $ | 195,996 | | $ | 76,651 | | $ | 119,345 |
| 155.7 | % | | ||||||||||||
Water Infrastructure | | | 60,284 | | | 33,326 | | | 26,958 | | 80.9 | % | | ||||||||||||
Oilfield Chemicals | | | 79,623 | | | 51,140 | |
| 28,483 |
| 55.7 | % | | ||||||||||||
Total revenue |
|
| 153,880 |
|
| 73,907 |
|
| 79,973 |
| 108.2 | % | |
| 335,903 | |
| 161,117 | |
| 174,786 |
| 108.5 | % | |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | ||||||||||||
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | | |
Water solutions |
|
| 88,087 |
|
| 49,996 |
|
| 38,091 |
| 76.2 | % | |||||||||||||
Accommodations and rentals |
|
| 11,976 |
|
| 4,969 |
|
| 7,007 |
| 141.0 | % | |||||||||||||
Wellsite completion and construction services |
|
| 10,888 |
|
| 6,299 |
|
| 4,589 |
| 72.9 | % | |||||||||||||
Water Services | |
| 158,060 | |
| 70,745 | |
| 87,315 |
| 123.4 | % | | ||||||||||||
Water Infrastructure | | | 44,939 | | | 26,237 | |
| 18,702 |
| 71.3 | % | | ||||||||||||
Oilfield Chemicals | | | 67,988 | | | 44,754 | | | 23,234 | | 51.9 | % | | ||||||||||||
Other | | | 1 | | | — | | | 1 | | NM | | | ||||||||||||
Depreciation and amortization |
|
| 23,420 |
|
| 21,613 |
|
| 1,807 |
| 8.4 | % | |
| 29,253 | |
| 21,018 | |
| 8,235 |
| 39.2 | % | |
Total costs of revenue |
|
| 134,371 |
|
| 82,877 |
|
| 51,494 |
| 62.1 | % | |
| 300,241 | |
| 162,754 | |
| 137,487 |
| 84.5 | % | |
Gross profit (loss) |
|
| 19,509 |
|
| (8,970) |
|
| 28,479 |
| NM |
| |
| 35,662 | |
| (1,637) | |
| 37,299 |
| 2278.5 | % | |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | ||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | | |
Selling, general and administrative |
|
| 16,087 |
|
| 8,764 |
|
| 7,323 |
| 83.6 | % | |
| 26,695 | |
| 15,890 | |
| 10,805 |
| 68.0 | % | |
Depreciation and amortization |
|
| 375 |
|
| 363 |
|
| 12 |
| 3.3 | % | |
| 526 | |
| 624 | |
| (98) |
| (15.7) | % | |
Lease abandonment costs |
|
| 590 |
|
| 13,169 |
|
| (12,579) |
| (95.5) | % | |
| 162 | |
| 222 | |
| (60) |
| (27.0) | % | |
Total operating expenses |
|
| 17,052 |
|
| 22,296 |
|
| (5,244) |
| (23.5) | % | |
| 27,383 | |
| 16,736 | |
| 10,647 |
| 63.6 | % | |
Income (loss) from operations |
|
| 2,457 |
|
| (31,266) |
|
| 33,723 |
| NM |
| |
| 8,279 | |
| (18,373) | |
| 26,652 |
| 145.1 | % | |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | ||||||||||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | | |
Gain (loss) on sales of property and equipment and divestitures, net | | | 731 | | | (1,657) | | | 2,388 |
| (144.1) | % | | ||||||||||||
Interest expense, net |
|
| (484) |
|
| (4,343) |
|
| 3,859 |
| (88.9) | % | |
| (494) | |
| (400) | |
| (94) |
| 23.5 | % | |
Other income, net |
|
| 326 |
|
| 431 |
|
| (105) |
| (24.4) | % | |||||||||||||
Income (loss) before tax expense |
|
| 2,299 |
|
| (35,178) |
|
| 37,477 |
| NM |
| |||||||||||||
Tax benefit (expense) |
|
| 294 |
|
| (26) |
|
| 320 |
| NM |
| |||||||||||||
Foreign currency (loss) gain, net | | | (6) | | | 4 | | | (10) |
| NM | | | ||||||||||||
Bargain purchase gain | | | 5,607 | | | — | | | 5,607 |
| NM | | | ||||||||||||
Other | |
| 875 | |
| 895 | |
| (20) |
| NM | | | ||||||||||||
Income (loss) before income tax (expense) benefit | |
| 14,992 | |
| (19,531) | |
| 34,523 |
| 176.8 | % | | ||||||||||||
Income tax expense | |
| (182) | |
| (84) | |
| (98) |
| NM | | | ||||||||||||
Equity in losses of unconsolidated entities | |
| (229) | |
| — | |
| (229) |
| NM | | | ||||||||||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | 37,797 |
| NM |
| | $ | 14,581 | | $ | (19,615) | | $ | 34,196 |
| 174.3 | % | |
Revenue
Our revenue increased $80.0$174.8 million, or 108.2%108.5%, to $153.9$335.9 million for the three months ended September 30, 2017Current Quarter compared to $73.9$161.1 million for the three months ended September 30, 2016. ThePrior Quarter. This increase was primarily attributable to ancomposed of a $119.3 million increase in Water Services revenue, a $27.0 million increase in Water Infrastructure revenue and a $28.5 million increase in Oilfield Chemicals revenue. These increases were driven primarily by higher demand for our services coupled with increased pricing in comparison to the Prior Quarter. Included in the increases in Water Services and Water Infrastructure were incremental revenue contributions from the Complete, Agua Libre and Basic, HB Rentals and Nuverra acquisitions. For the Current Quarter, our Water Solutions segment revenues of $64.1 million. For the three months ended September 30, 2017, ourServices, Water Solutions, AccommodationsInfrastructure and Rentals,Oilfield Chemicals constituted 58.3%, 18.0% and Wellsite Completion and Construction Services segments constituted 81.3%, 10.1% and 8.6%23.7% of our total revenue, respectively, compared to 82.5%47.6%, 7.9%,20.7% and 9.6% 31.7%, respectively, for the three months ended September 30, 2016.Prior Quarter. The revenue increasechanges by operatingreportable segment wasare as follows:
45
Water SolutionsServices. Revenue increased $64.1$119.3 million, or 105.1%155.7%, to $125.1$196.0 million for the three months ended September 30, 2017Current Quarter compared to $61.0$76.7 million for the three months ended September 30, 2016.Prior Quarter. The increase was primarily attributable to an increase in thehigher demand for our services as a result of a risecoupled with increase pricing in completion activities and an increase in average quarterly rig count of 97.4% during the third quarter of 2017 comparedcomparison to the third quarter of 2016. Additionally,Prior Quarter. The increase was also impacted by incremental revenue contributed by the GRR Acquisition, which closed March 10, 2017, contributed $10.4 million of revenue for the three months ended September 30, 2017.Complete, Basic, HB Rentals and Nuverra acquisitions.
36
Accommodations and Rentals. Water Infrastructure. Revenue increased $9.8by $27.0 million, or 167.5%80.9%, to $15.6$60.3 million for the three months ended September 30, 2017Current Quarter compared to $5.8$33.3 million for the three months ended September 30, 2016. The revenue increase was primarily attributable to a rise in completion activities and an increase in our customers’ quarterly rig count, which led to higher demand for equipment rentals as well as an increase in pricing for such rentals and other related services.
Wellsite Completion and Construction Services. Revenue increased $6.1 million, or 85.8%, to $13.2 million for the three months ended September 30, 2017 compared to $7.1 million for the three months ended September 30, 2016.Prior Quarter. The increase was primarily attributable to an increase in field services revenues of $5.1 million in our Rockies and Permian regions and increases in crane services revenues of $1.9 million, offset by $0.9 million due to the closure of our South Texas field services at the end of 2016. These increases were driven by the addition of the Permian region in 2017 and by increased demand for these services resulting from several new customers resuming completion activities during 2017.
Costs of Revenue
Cost of revenue increased $51.5 million, or 62.1%, to $134.4 million for the three months ended September 30, 2017 compared to $82.9 million for the three months ended September 30, 2016. The increase was largely attributable to higher salaries and wages due to an increase in employee headcount, and increased outside services, rentals and materials expense as a result of increased demand for our services resulting fromin comparison to the overallPrior Quarter. The increase in drilling, completionwas also modestly impacted by incremental revenue contributed by the Complete, Agua Libre and production activities, particularly in our Water Solutions segment. The cost of revenue increase by operating segment was as follows:Nuverra acquisitions.
Water SolutionsOilfield Chemicals. Cost of revenueRevenue increased $38.1$28.5 million, or 76.2%55.7%, to $88.1$79.6 million for the three months ended September 30, 2017Current Quarter compared to $50.0$51.1 million for the three months ended September 30, 2016. The increase was partly attributable to an increase in salaries and wages of $14.7 million resulting from a 48% increase in average headcount during the three months ended September 30, 2017 as compared to the prior year period. The increase in cost of revenue was also attributable to an increase in contract labor expense of $7.6 million, materials and supplies expense of $6.8 million, equipment rental and maintenance expense of $4.7 million, bulk and retail fuel expense of $2.9 million and allocated insurance costs of $0.4 million, offset by a decrease in allocated facility costs of $0.4 million. The increase in fuel and maintenance related expenses were largely attributable to a 28.1% increase in the average number of trucks and tractors in our fleet.
Accommodations and Rentals. Cost of revenue increased $7.0 million, or 141.0%, to $12.0 million for the three months ended September 30, 2017 compared to $5.0 million for the three months ended September 30, 2016. The increase was partially attributable to an increase in salaries and wages of $1.9 million resulting from an 85% increase in average headcount during the three months ended September 30, 2017 as compared to the prior year period. This increase in labor workforce also resulted in a $1.1 million increase of certain labor support costs including fuel and repair and maintenance expenses. The cost of revenue increase was also partly attributable to increases in outside services, equipment rentals and variable supplies expense totaling $3.7 million resulting from increased demand for services.
Wellsite Completion and Construction Services. Cost of revenue increased $4.6 million, or 72.9%, to $10.9 million for the three months ended September 30, 2017 compared to $6.3 million for the three months ended September 30, 2016.Prior Quarter. The increase was primarily attributable to higher demand for our services in comparison to the Prior Quarter.
Costs of Revenue
Costs of revenue increased direct labor$137.5 million, or 84.5%, to $300.2 million for the Current Quarter compared to $162.8 million for the Prior Quarter. The increase was primarily composed of an $87.3 million increase in Water Services costs, an $18.7 million increase in Water Infrastructure costs, and a $23.2 million increase in Oilfield Chemicals costs due to supporting the higher revenue producing activity discussed above.
Water Services. Costs of $1.7revenue increased $87.3 million, contract labor expenseor 123.4%, to $158.1 million for the Current Quarter compared to $70.7 million for the Prior Quarter. Cost of $2.2revenue as a percent of revenue decreased from 92.3% to 80.6% due primarily to economies of scale from higher revenue activity. The Prior Quarter was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of the COVID-19 pandemic.
Water Infrastructure. Costs of revenue increased $18.7 million, and rental expenseor 71.3%, to $44.9 million for the Current Quarter compared to $26.2 million for the Prior Quarter. Cost of $0.7 million.revenue as a percent of revenue decreased from 78.7% to 74.5% due primarily to a higher relative contribution of high-margin disposal revenue.
Oilfield Chemicals. Costs of revenue increased $23.2 million, or 51.9%, to $68.0 million for the Current Quarter compared to $44.8 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 87.5% to 85.4% due primarily to picking up additional market share for our portfolio of products. The Prior Quarter was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of the COVID-19 pandemic.
Depreciation and Amortization. Depreciation and amortization expense increased $1.8$8.2 million, or 8.4%39.2%, to $23.4$29.3 million for the three months ended September 30, 2017Current Quarter compared to $21.6$21.0 million for the three months ended September 30, 2016. The increase wasPrior Quarter, due primarily attributable to the depreciation recognized in the three months ended September 30, 2017a higher fixed asset base related to recently acquired assets from the GRR Acquisition, the DAWS Acquisition and the TEX Acquisition.
37
acquisitions occurring after June 30, 2021.
Gross Profit (Loss)
Gross profit (loss) improved by $28.5 million, to a gross profit of $19.5was $35.7 million for the three months ended September 30, 2017Current Quarter compared to a gross loss of $9.0$1.6 million for the Prior Quarter due primarily to higher revenue in all three months ended September 30, 2016segments resulting from increased activity levels. Gross profit increased by $32.0 million, $8.3 million and $5.2 million in our Water Services, Water Infrastructure and Oilfield Chemicals segments, respectively. Partially offsetting the increase in gross profit was a $8.2 million increase in depreciation and amortization expense. Gross margin as a resultpercent of factors described above.revenue was 10.6% and (1.0%) in the Current Quarter and Prior Quarter, respectively.
Selling, General and Administrative Expenses
The increase in selling,Selling, general and administrative expenses of $7.3increased $10.8 million, or 83.6%68.0%, to $16.1$26.7 million for the three months ended September 30, 2017Current Quarter compared to $8.8$15.9 million for the three months ended September 30, 2016Prior Quarter. The increase was due primarily to $2.3 million higher wages and associated payroll taxes, a $1.4 million increase in equity-based compensation costs, a $1.4 million increase in
46
incentive compensation cost, a $1.2 million increase in bad debt expense, $1.1 million of costs from the additional personnel and related back-office expenses as a result of our recent acquisitions, comprised of $0.4 million of personnel costs and $0.7 million of other back-office costs, $1.3 million in higher vehicle lease costs, a $0.4 million increase in travel, meals and entertainment costs and $1.7 million from a combination of other expenses.
Net Interest Expense
Net interest expense increased by $0.1 million, or 23.5%, to $0.5 million for the Current Quarter compared to $0.4 million in the Prior Quarter due primarily to lower interest income related to notes receivable that were converted to an equity-method investment during the Current Period and higher interest expense due to an increaseborrowings in administrative labor coststhe Current Quarter.
Bargain Purchase Gain
Bargain purchase gain of $1.5$5.6 million in the Current Quarter was comprised of net adjustments related to acquisitions occurring between July 2021 and February 2022.
Other
Other income was $0.9 million in both the Current Quarter and Prior Quarter. During the Current Quarter, other income was primarily related to the sale of excess assets acquired in our new status as a public company and an increase in legal and professional fees of $4.9 million duringrecent acquisitions. During the three months ended September 30, 2017 as compared to the prior year period, largelyPrior Quarter, other income was primarily related to the Merger, offset by lower corporate office rentmark-to-market of less than $0.1 million.
Lease Abandonment Costs
Due to depressed industry conditions and a resulting reduction inequity securities using the need for facilities primarily in 2016, during the three months ended September 30, 2017, we recorded $0.6 million of lease abandonment costs related to certain facilities that were no longer in use. During the three months ended September 30, 2016, we recorded $13.2 million of lease abandonment costs related to certain facilities that were no longer in use.
Interest Expense
The decrease in interest expense of $3.9 million, or 88.9% during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was due to the completion of the 144A Offering on December 20, 2016 and the completion of the IPO on April 26, 2017. We used a portion of the net proceeds from the 144A Offering to repay all outstanding borrowings and a portion of the net proceeds from the IPO to repay all of our subsequent outstanding indebtedness related to the GRR Acquisition.fair value option.
Net LossIncome (Loss)
Net incomeIncome (loss) improvedincreased by $37.8$34.2 million, to a net income of $2.6$14.5 million for the three months ended September 30, 2017Current Quarter compared to a net loss of $35.2$19.6 million for the three months ended September 30, 2016 asPrior Quarter, driven primarily by increased revenue due to a resultgradual increase in demand for our services and a bargain purchase gain of $5.6 million. The Prior Quarter was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of the factors described above.COVID-19 pandemic.
3847
Nine Months Ended September 30, 2017Current Period Compared to the Nine Months Ended September 30, 2016Prior Period
| | | | | | | | | | | | | | ||||||||||||
| | Six months ended June 30, | | Change |
| | |||||||||||||||||||
|
| 2022 |
| 2021 |
| Dollars |
| Percentage |
| | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Nine months ended September 30, |
| Change |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| Dollars |
| Percentage |
| |||||||||||||||
|
|
| (in thousands) |
|
|
|
|
|
| ||||||||||||||||
| | | (in thousands) | | | | | |
| | |||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
| | |
Water solutions |
| $ | 311,275 |
| $ | 173,157 |
| $ | 138,118 |
| 79.8 | % | |||||||||||||
Accommodations and rentals |
|
| 38,457 |
|
| 19,585 |
|
| 18,872 |
| 96.4 | % | |||||||||||||
Wellsite completion and construction services |
|
| 38,522 |
|
| 22,923 |
|
| 15,599 |
| 68.0 | % | |||||||||||||
Water Services | | $ | 359,602 | | $ | 140,874 | | $ | 218,728 |
| 155.3 | % | | ||||||||||||
Water Infrastructure | | | 118,838 | | | 71,129 | | | 47,709 | | 67.1 | % | | ||||||||||||
Oilfield Chemicals | | | 152,232 | | | 92,856 | |
| 59,376 |
| 63.9 | % | | ||||||||||||
Total revenue |
|
| 388,254 |
|
| 215,665 |
|
| 172,589 |
| 80.0 | % | |
| 630,672 | |
| 304,859 | |
| 325,813 |
| 106.9 | % | |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | ||||||||||||
Costs of revenue |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | | |
Water solutions |
|
| 226,737 |
|
| 144,653 |
|
| 82,084 |
| 56.7 | % | |||||||||||||
Accommodations and rentals |
|
| 30,697 |
|
| 15,527 |
|
| 15,170 |
| 97.7 | % | |||||||||||||
Wellsite completion and construction services |
|
| 32,155 |
|
| 19,817 |
|
| 12,338 |
| 62.3 | % | |||||||||||||
Water Services | |
| 295,106 | |
| 133,069 | |
| 162,037 |
| 121.8 | % | | ||||||||||||
Water Infrastructure | | | 89,317 | | | 52,636 | |
| 36,681 |
| 69.7 | % | | ||||||||||||
Oilfield Chemicals | | | 130,151 | | | 82,520 | | | 47,631 | | 57.7 | % | | ||||||||||||
Other | | | 1 | | | — | | | 1 | | NM | | | ||||||||||||
Depreciation and amortization |
|
| 67,144 |
|
| 73,874 |
|
| (6,730) |
| (9.1) | % | |
| 55,753 | |
| 42,668 | |
| 13,085 |
| 30.7 | % | |
Total costs of revenue |
|
| 356,733 |
|
| 253,871 |
|
| 102,862 |
| 40.5 | % | |
| 570,328 | |
| 310,893 | |
| 259,435 |
| 83.4 | % | |
Gross profit (loss) |
|
| 31,521 |
|
| (38,206) |
|
| 69,727 |
| NM |
| |
| 60,344 | |
| (6,034) | |
| 66,378 |
| 1100.1 | % | |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | ||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | | |
Selling, general and administrative |
|
| 49,298 |
|
| 25,928 |
|
| 23,370 |
| 90.1 | % | |
| 55,010 | | | 35,784 | |
| 19,226 |
| 53.7 | % | |
Depreciation and amortization |
|
| 1,312 |
|
| 1,644 |
|
| (332) |
| (20.2) | % | |
| 1,093 | | | 1,273 | |
| (180) |
| (14.1) | % | |
Impairment of goodwill and other intangible assets |
|
| — |
|
| 138,666 |
|
| (138,666) |
| (100.0) | % | |||||||||||||
Impairment of property and equipment |
|
| — |
|
| 60,026 |
|
| (60,026) |
| (100.0) | % | |||||||||||||
Lease abandonment costs |
|
| 2,871 |
|
| 13,169 |
|
| (10,298) |
| (78.2) | % | |
| 253 | | | 326 | |
| (73) |
| (22.4) | % | |
Total operating expenses |
|
| 53,481 |
|
| 239,433 |
|
| (185,952) |
| (77.7) | % | |
| 56,356 | |
| 37,383 | |
| 18,973 |
| NM | | |
Loss from operations |
|
| (21,960) |
|
| (277,639) |
|
| 255,679 |
| (92.1) | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations | |
| 3,988 | |
| (43,417) | |
| 47,405 |
| NM | | | ||||||||||||
| | | | | | | | | | | | | | ||||||||||||
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
| | | |
Gain (loss) on sales of property and equipment and divestitures, net | | | 2,384 | | | (2,236) | | | 4,620 |
| (206.6) | % | | ||||||||||||
Interest expense, net |
|
| (1,885) |
|
| (11,792) |
|
| 9,907 |
| (84.0) | % | |
| (1,214) | | | (835) | |
| (379) |
| 45.4 | % | |
Other income, net |
|
| 3,342 |
|
| 588 |
|
| 2,754 |
| 468.4 | % | |||||||||||||
Loss before tax expense |
|
| (20,503) |
|
| (288,843) |
|
| 268,340 |
| (92.9) | % | |||||||||||||
Tax benefit (expense) |
|
| 326 |
|
| (392) |
|
| 718 |
| NM |
| |||||||||||||
Net loss |
| $ | (20,177) |
| $ | (289,235) |
| $ | 269,058 |
| (93.0) | % | |||||||||||||
Foreign currency (loss) gain, net | | | (3) | | | 7 | | | (10) |
| NM | | | ||||||||||||
Bargain purchase gain | | | 17,041 | | | — | | | 17,041 |
| NM | | | ||||||||||||
Other | |
| 1,124 | | | (734) | |
| 1,858 |
| NM | | | ||||||||||||
Income (loss) before income tax (expense) benefit | |
| 23,320 | |
| (47,215) | |
| 70,535 |
| NM | | | ||||||||||||
Income tax (expense) benefit | |
| (396) | |
| 179 | |
| (575) |
| NM | | | ||||||||||||
Equity in losses of unconsolidated entities | | | (358) | |
| — | |
| (358) |
| NM | | | ||||||||||||
Net income (loss) | | $ | 22,566 | | $ | (47,036) | | $ | 69,602 |
| NM | | |
Revenue
Our revenue increased $172.6$325.8 million, or 80.0%106.9%, to $388.3$630.7 million for the nine months ended September 30, 2017Current Period compared to $215.7$304.9 million for the nine months ended September 30, 2016. ThePrior Period. This increase was primarily attributable to ancomposed of a $218.7 million increase in Water Services revenue, a $47.7 million increase in Water Infrastructure revenue and a $59.4 million increase in Oilfield Chemicals revenue. These increases were driven primarily by higher demand for our services coupled with increased pricing in comparison to the Prior Period. Included in the increases in Water Services and Water Infrastructure were incremental revenue contributions from the Complete, Agua Libre and Basic, HB Rentals and Nuverra acquisitions. For the Current Period, our Water Solutions segment revenues of $138.1 million. For the nine months ended September 30, 2017, ourServices, Water Solutions, AccommodationsInfrastructure and Rentals,Oilfield Chemicals constituted 57.0%, 18.8% and Wellsite Completion and Construction Services segments constituted 80.2%, 9.9% and 9.9%24.2% of our total revenue, respectively, compared to 80.3%46.2%, 9.1%,23.3% and 10.6% 30.5%, respectively, for the nine months ended September 30, 2016.Prior Period. The revenue increasechanges by operatingreportable segment wasare as follows:
Water SolutionsServices. Revenue increased $138.1$218.7 million, or 79.8%155.3%, to $311.3$359.6 million for the nine months ended September 30, 2017Current Period compared to $173.2$140.9 million for the nine months ended September 30, 2016.Prior Period. The increase was primarily attributable to an increase in thehigher demand for our services as a result of a rise in completion activities and an increase in average quarterly rig count of 77.2% during the nine months ended September 30, 2017 compared to nine months ended September 30, 2016. Additionally, the GRR Acquisition, which closed on March 10, 2017, contributed $21.5 million of revenue for the nine months ended September 30, 2017.
3948
services coupled with increased pricing in comparison to the Prior Period. The increase was also impacted by incremental revenue contributed by the Complete, Basic, HB Rentals and Nuverra acquisitions.
Accommodations and Rentals. Water Infrastructure. Revenue increased $18.9by $47.7 million, or 96.4%67.1%, to $38.5$118.8 million for the nine months ended September 30, 2017Current Period compared to $19.6$71.1 million for the nine months ended September 30, 2016. The revenue increase was primarily attributable to a rise in completion activities and an increase in our customers’ quarterly rig count, which led to higher demand for equipment rentals.
Wellsite Completion and Construction Services. Revenue increased $15.6 million, or 68.0%, to $38.5 million for the nine months ended September 30, 2017 compared to $22.9 million for the nine months ended September 30, 2016.Prior Period. The increase was primarily attributable to an increasehigher demand for our services in field services revenues of $12.9 million in our Rockies and Permian regions, increases in construction services revenue of $2.3 million in our South Texas region and increases in crane services revenues of $3.8 million, offset by $3.1 million duecomparison to the closure of our South Texas field services at the end of 2016. These increases were driven by the addition of the Permian region in 2017 and by the increased demand for these services resulting from several new customers resuming completion activities during 2017.
Costs of Revenue
Cost of revenue increased $102.9 million, or 40.5%, to $356.7 million for the nine months ended September 30, 2017 compared to $253.9 million for the nine months ended September 30, 2016. The increase was largely attributable to higher salaries and wages due to an increase in employee headcount, and increased outside services, rentals and materials as a result of increased demand for ours services resulting from the overall increase in drilling, completion and production activities, particularly in our Water Solutions segment. The cost of revenue increase by operating segment was as follows:
Water Solutions. Cost of revenue increased $82.1 million, or 56.7%, to $226.7 million for the nine months ended September 30, 2017 compared to $144.7 million for the nine months ended September 30, 2016. The increase was partly attributable to an increase in salaries and wages of $28.0 million as a result of a 28% increase in average headcount during the nine months ended September 30, 2017 as compared to the prior year period.Prior Period. The increase was also attributable to an increase in materialsmodestly impacted by incremental revenue contributed by the Complete, Agua Libre and supplies expense of $17.0 million, contract labor expense of $16.1 million, equipment rental and maintenance expense of $11.3 million and bulk and retail fuel expense of $7.3 million, offset by a decrease in allocated facility costs of $3.3 million.Nuverra acquisitions.
Accommodations and RentalsOilfield Chemicals. Cost of revenueRevenue increased $15.2$59.4 million, or 97.7%63.9%, to $30.7$152.2 million for the nine months ended September 30, 2017Current Period compared to $15.5$92.9 million for the nine months ended September 30, 2016. The increase was partially attributable to an increase in salaries and wages of $3.8 million resulting from a 45% increase in average headcount during the nine months ended September 30, 2017 as compared to the prior year period. This increase in labor workforce also resulted in a $2.8 million increase of certain labor support costs including fuel and repair and maintenance expenses. The cost of revenue increase was also partly attributable to increases in outside services, equipment rentals and variable supplies expense totaling $8.1 million resulting from increased demand for services.
Wellsite Completion and Construction Services. Cost of revenue increased $12.3 million, or 62.3%, to $32.2 million for the nine months ended September 30, 2017 compared to $19.8 million for the nine months ended September 30, 2016.Prior Period. The increase was primarily attributable to expansion intohigher demand for our services in comparison to the Permian regionPrior Period.
Costs of Revenue
Costs of revenue increased $259.4 million, or 83.4%, to $570.3 million for the Current Period compared to $310.9 million for the Prior Period. The increase was primarily composed of a $162.0 million increase in 2017Water Services costs, a $36.7 million increase in Water Infrastructure costs, and new customer wins which leda $47.6 million increase in Oilfield Chemicals costs due to supporting the higher revenue producing activity discussed above. Current Period inflation also impacted variable costs for labor, fuel and services. We were able to pass much of these increased costs to customers with surcharges and pricing increases.
Water Services. Costs of revenue increased $162.0 million, or 121.8%, to $295.1 million for the Current Period compared to $133.1 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 94.5% to 82.1% due primarily to economies of scale from higher revenue activity. The Prior Period was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of the COVID-19 pandemic.
Water Infrastructure. Costs of revenue increased $36.7 million, or 69.7%, to $89.3 million for the Current Period compared to $52.6 million for the Prior Period. Cost of revenue as a percent of revenue increased from 74.0% to 75.2% due primarily to a lower relative contribution of high-margin pipeline revenue.
Oilfield Chemicals. Costs of revenue increased $47.6 million, or 57.7%, to $130.2 million for the Current Period compared to $82.5 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 88.9% to 85.5% due primarily to higher directutilization and contract labor expensescost absorption at our manufacturing facilities. The Prior Period was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of $8.0 million. To support this increased labor expense, increases in fuel and repair and maintenance costs of $1.2 million were incurred. This cost of revenue increase was also partially attributable to increases in equipment rental costs of $2.2 million and supplies and materials expense of $0.9 million needed to support customer demand.the COVID-19 pandemic.
Depreciation and Amortization. Depreciation and amortization expense decreased $6.7increased $13.1 million, or 9.1%30.7%, to $67.1$55.8 million for the nine months ended September 30, 2017Current Period compared to $73.9$42.7 million for the nine months ended SeptemberPrior Period, due primarily to a higher fixed asset base related to acquisitions occurring after June 30, 2016. The decrease was primarily attributable to assets becoming fully depreciated or being impaired during the first half of 2016.
40
2021.
Gross Profit (Loss)
Gross profit (loss) improved by $69.7was $60.3 million for the Current Period compared to a gross profitloss of $31.5$6.0 million for the nine months ended September 30, 2017 comparedPrior Period due primarily to higher revenue in all three segments resulting from increased activity levels. Gross profit increased by $56.7 million, $11.0 million and $11.7 million in our Water Services, Water Infrastructure and Oilfield Chemicals segments, respectively. Partially offsetting the increase in gross loss of $38.2profit was a $13.1 million for the nine months ended September 30, 2016increase in depreciation and amortization expense. Gross margin as a resultpercent of factors described above.revenue was 9.6% and (2.0%) in the Current Period and Prior Period, respectively.
Selling, General and Administrative Expenses
The increase in selling,Selling, general and administrative expenses of $23.4increased $19.2 million, or 90.1%53.7%, to $49.3$55.0 million for the nine months ended September 30, 2017Current Period compared to $25.9$35.8 million for the nine months ended September 30, 2016Prior Period. The increase was due primarily due to $4.4 million higher wages and associated payroll taxes, $3.5 million of costs from the additional personnel and related back-office expenses as a payout onresult
49
of our phantom equity unitsrecent acquisitions, comprised of $1.1 million of personnel costs and IPO success bonuses$2.4 million of $12.5other back-office costs, a $3.3 million including associated taxes, an increase in administrative laborequity-based compensation costs, of $2.7$2.1 million primarily related to our new status as a public company, and an increase in higher vehicle lease costs, $1.8 million higher legal and professional feesservices in connection with work related to acquisitions, a $1.8 million increase in incentive compensation cost, a $1.3 million increase in bad debt expense, a $0.9 million increase in travel, meals and entertainment costs and $3.3 million from a combination of $6.4other expenses partially offset by $3.2 million in Prior Period severance expense.
Net Interest Expense
Net interest expense increased by $0.4 million, or 45.4%, to $1.2 million for the Current Period compared to $0.8 million in the Prior Period due primarily to writing off unamortized deferred debt issuance costs in connection with amending and restating the Prior Credit Agreement in the Current Period, lower interest income related to notes receivable that were converted to an equity-method investment during the Current Period and higher interest expense due to borrowings in the Current Period.
Bargain Purchase Gain
Bargain purchase gain of $17.0 million in the Current Period was comprised of $7.2 million related to the Nuverra Acquisition and $9.8 million in adjustments related to acquisitions that occurred in 2021.
Other
Other income was $1.1 million in the Current Period compared to other expense of $0.7 million in the Prior Period. During the Current Period, other income was primarily related to the Merger, GRR Acquisition andsale of excess assets acquired in our recent acquisitions. During the Prior Period, other deal costs, during the nine months ended September 30, 2017 as comparedexpenses were primarily related to the prior year period offset by lower corporate office rentmark-to-market of $0.6 million.
Impairment
There were no impairment losses recorded duringequity securities using the nine months ended September 30, 2017. Due to significant reductions in oil and gas prices and rig counts during early 2016, we determined there were triggering events requiring an assessment of the recoverability of goodwill. This assessment resulted in our recognition in our consolidated statements of operations for the nine months ended September 30, 2016 of an impairment loss of $137.6 million related to goodwill and $60.0 million related to long-lived assets in our Water Solutions segment, $1.0 million related to goodwill and less than $0.1 million related to other intangible assets in our Accommodations and Rentals segment.
Lease Abandonment Costs
Due to depressed industry conditions and a resulting reduction in the need for facilities, we decided to close certain facilities beginning in the third quarter of 2016. As a result of continuing costs related to certain facilities that are no longer in use, we recorded $2.9 million of lease abandonment costs during the nine months ended September 30, 2017. We recorded $13.2 million of lease abandonment costs during the nine months ended September 30, 2016.
Interest Expense
The decrease in interest expense of $9.9 million, or 84.0%, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was due to the completion of the 144A Offering on December 20, 2016 and the completion of the IPO on April 26, 2017. We used a portion of the net proceeds from the 144A Offering to repay all outstanding borrowings and a portion of the net proceeds from the IPO to repay all of our subsequent outstanding indebtedness related to GRR Acquisition.fair value option.
Net LossIncome (Loss)
Net loss decreasedIncome (loss) increased by $269.1$69.6 million, or 93.0%, to $20.2a net income of $22.6 million for the nine months ended September 30, 2017Current Period compared to $289.2a net loss of $47.0 million for the nine months ended September 30, 2016 largely asPrior Period, driven primarily by increased revenue due to a resultgradual increase in demand for our services and a bargain purchase gain of $17.0 million. The Prior Period was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of the impairment losses and other factors described above.COVID-19 pandemic.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus taxes, interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus/(minus)plus non-cash losses/(gains)losses on the sale of assets or subsidiaries, non-recurring compensation expense,
41
non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures.expenditures, plus/(minus) foreign currency losses/(gains) and plus/(minus) losses/(gains) on unconsolidated entities less bargain purchase gains from business combinations. The adjustments to EBITDA are generally consistent with such adjustments described in our Sustainability-Linked Credit Facility. See “—Comparison of Non-GAAP Financial Measures” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. We present EBITDA and Adjusted EBITDA
50
because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to the exclusion of some but not all items that affect the most directly comparable GAAP financial measures. YouOne should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see “Summary—Summary Consolidated Financial Data” in our Final Prospectus.
The following table presents asets forth our reconciliation of EBITDA and Adjusted EBITDA to our net loss,income (loss), which is the most directly comparable GAAP measure for the periods presented:
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | ||||
| | (in thousands) | ||||||||||
Net income (loss) | | $ | 14,581 | | $ | (19,615) | | $ | 22,566 | | $ | (47,036) |
Interest expense, net | | | 494 | | | 400 | | | 1,214 | | | 835 |
Income tax expense (benefit) | | | 182 | | | 84 | | | 396 | | | (179) |
Depreciation and amortization | | | 29,779 | | | 21,642 | | | 56,846 | | | 43,941 |
EBITDA | | | 45,036 | | | 2,511 | | | 81,022 | | | (2,439) |
Non-cash compensation expenses | | | 3,944 | | | 2,524 | | | 7,219 | | | 3,946 |
Nonrecurring severance expenses(1) | | | — | | | — | | | — | | | 3,225 |
Non-cash loss on sale of assets or subsidiaries(2) | | | 1,013 | | | 2,150 | | | 1,533 | | | 2,847 |
Nonrecurring transaction costs(3) | | | 2,879 | | | 149 | | | 6,496 | | | 561 |
Lease abandonment costs | | | 162 | | | 222 | | | 253 | | | 326 |
Bargain purchase gain | | | (5,607) | | | — | | | (17,041) | | | — |
Equity in losses of unconsolidated entities | | | 229 | | | — | | | 358 | | | — |
Foreign currency loss (gain), net | | | 6 | | | (4) | | | 3 | | | (7) |
Adjusted EBITDA | | $ | 47,662 | | $ | 7,552 | | $ | 79,843 | | $ | 8,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
|
| 2016 |
| 2017 |
|
| 2016 | ||
|
| (In thousands) |
| (In thousands) | ||||||||
Net income (loss) |
| $ | 2,593 |
| $ | (35,204) |
| $ | (20,177) |
| $ | (289,235) |
Interest expense |
|
| 484 |
|
| 4,343 |
|
| 1,885 |
|
| 11,792 |
Depreciation and amortization |
|
| 23,795 |
|
| 21,976 |
|
| 68,456 |
|
| 75,518 |
Tax (benefit) expense |
|
| (294) |
|
| 26 |
|
| (326) |
|
| 392 |
EBITDA |
|
| 26,578 |
|
| (8,859) |
|
| 49,838 |
|
| (201,533) |
Impairment |
|
| — |
|
| — |
|
| — |
|
| 198,692 |
Lease abandonment costs |
|
| 590 |
|
| 13,169 |
|
| 2,871 |
|
| 13,169 |
Non-recurring severance costs |
|
| — |
|
| 147 |
|
| 122 |
|
| 689 |
Non-recurring deal costs |
|
| 4,382 |
|
| 20 |
|
| 5,462 |
|
| (236) |
Non-cash incentive compensation |
|
| 549 |
|
| (1) |
|
| 1,781 |
|
| (488) |
Non-cash loss on sale of subsidiaries and other assets |
|
| 268 |
|
| (491) |
|
| 775 |
|
| (29) |
Non-recurring phantom equity and IPO-related compensation |
|
| — |
|
| — |
|
| 12,537 |
|
| — |
Adjusted EBITDA |
| $ | 32,367 |
| $ | 3,985 |
| $ | 73,386 |
| $ | 10,264 |
(1) | For the Prior Period, these costs related to severance costs associated with our former CEO. |
(2) | For all periods presented, the losses were due primarily to sales of real estate and underutilized or obsolete property and equipment. |
(3) | For all periods presented, these costs were due primarily to legal-related due diligence costs as well as costs related to certain acquired subsidiaries. |
EBITDA was $45.0 million for the Current Quarter compared to $2.5 million for the Prior Quarter. The $42.5 million increase in EBITDA was driven primarily by an increase of $45.5 million in gross profit, a $2.4 million increase in net gains from asset sales and a $5.6 million bargain purchase gain in the Current Quarter partially offset by a $10.8 million increase in selling, general and administrative costs. Adjusted EBITDA was $47.7 million for the Current Quarter compared to $7.6 million for the Prior Quarter. The $40.1 million increase is primarily attributable to the items discussed above.
51
EBITDA was $81.0 million for the Current Period compared to ($2.4) million for the Prior Period. The $83.5 million increase in EBITDA was driven primarily by an increase of $79.5 million in gross profit, a $17.0 million bargain purchase gain in the Current Period and a $4.6 million increase in net gains from asset sales partially offset by a $19.2 million increase in selling, general and administrative costs. Adjusted EBITDA was $79.8million for the Current Period compared to $8.5 million for the Prior Period. The $71.3 million increase is primarily attributable to the items discussed above.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been capital contributionsare cash on hand, borrowing capacity under the Sustainability-Linked Credit Facility, cash flows from our members, the netoperations and proceeds from the 144A Offering, the net proceeds from the IPO, borrowings under our Credit Facilitysale of excess property and cash flows from
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operations.equipment. Our primary uses of capital have been to fund current operations, maintain our asset base, implement technological advancements, make capital expenditures to support organic growth, fund acquisitions and fund acquisitions.minority investments, and when appropriate, repurchase shares of Class A Common Stock in the open market. Depending uponon available opportunities, market conditions and other factors, we may also issue debt and equity securities, in the future, if needed.
As of June 30, 2022, we had no outstanding bank debt and a positive net cash position. We prioritize sustained positive free cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to the economics of the opportunity. We believe this approach provides us with additional flexibility to evaluate larger investments as well as improved resilience in a sustained downturn versus many of our peers.
Based on our current cash and cash equivalents balance, operating cash flow, available borrowings under our Sustainability-Linked Credit Facility and the ongoing actions discussed above, we believe that we will be able to maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants through the next twelve months and beyond, prior to giving effect to any future financing that may occur.
We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash on hand, cash generated from operations and borrowings fromunder our Sustainability-Linked Credit Facility. For a discussion of the Sustainability-Linked Credit Facility, see “—Sustainability-Linked Credit Facility” below. WeAlthough we cannot provide any assurance, we believe that our current cash balance, operating cash flow and available borrowings under our Sustainability-Linked Credit Facility will be sufficient to fund our operations for at least the next twelve months.
On April 26, 2017, we completed the IPO for net proceedsAs of approximately $111.4 million, net of underwriting discounts and commissions and estimated offering expenses. We contributed all of these net proceeds to SES Holdings in exchange for SES Holdings LLC Units. SES Holdings used the net proceeds to repay borrowings incurred under our Credit Facility to fund the cash portion of the purchase price of the GRR Acquisition, for the cash settlement of outstanding phantom unit awards at SES Holdings and for 2017 budgeted capital expenditures.On May 10, 2017, we received approximately $17.1 million, net of underwriting discounts and commissions and estimated offering expenses, from the exercise in full by the underwriters of our IPO of their option to purchase additional shares of our Select Class A Common Stock. We used the net proceeds from the underwriters’ option exercise for general corporate purposes, including funding 2017 budgeted capital expenditures.
At SeptemberJune 30, 2017,2022, cash and cash equivalents totaled $42.4 million. In addition to cash$25.7 million, and cash equivalents, we had approximately $85.9$195.6 million of available borrowing capacity under our Sustainability-Linked Credit Facility. As of June 30, 2022, the borrowing base under the Sustainability-Linked Credit Facility aswas $216.5 million, we had no outstanding borrowings and outstanding letters of September 30, 2017.credit totaled $20.9 million. As of August 1, 2022, we had no outstanding borrowings, the borrowing base under the Sustainability-Linked Credit Facility was $227.8 million, the outstanding letters of credit totaled $20.9 million, and the available borrowing capacity under the Sustainability-Linked Credit Facility was $206.9 million.
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
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| Nine months ended September 30, |
| Change | |||||
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| 2016 |
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Net cash (used in) provided by operating activities |
| $ | (4,249) |
| $ | 8,078 |
| $ | (12,327) |
Net cash used in investing activities |
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| (121,535) |
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| (20,372) |
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| (101,163) |
Net cash provided by financing activities |
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| 128,136 |
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| 2,730 |
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| 125,406 |
Net increase (decrease) in cash |
| $ | 2,352 |
| $ | (9,564) |
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| | Six months ended June 30, | | Change | | |||||||
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| 2022 |
| 2021 |
| Dollars |
| Percentage | | |||
| | (in thousands) | | | | | | | ||||
Net cash used in operating activities | | $ | (7,468) | | $ | (11,439) | | $ | 3,971 | | 34.7 | % |
Net cash used in investing activities | | | (11,888) | | | (11,491) | | | (397) | | (3.5) | % |
Net cash used in financing activities | | | (40,697) | | | (2,407) | | | (38,290) | | (1590.8) | % |
Subtotal | | | (60,053) | | | (25,337) | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (6) | | | 20 | | | (26) | | NM | |
Net decrease in cash, cash equivalents, and restricted cash | | $ | (60,059) | | $ | (25,317) | | | | | | |
Analysis of Cash Flow Changes Betweenbetween the NineSix Months Ended SeptemberJune 30, 20172022 and 20162021
Operating Activities. Net cash used in operating activities was $4.2$7.5 million for the nine months ended September 30, 2017,Current Period, compared to net cash provided by operating activities of $8.1$11.4 million forin the nine months ended September 30, 2016.Prior Period. The $12.3$4.0 million decrease in net cash provided by operating activities wasis due primarily attributable to increases in accounts receivable and working capital during the nine months ended September 30, 2017 in response to growth in revenues driven by recovering demand for our services as compared to the prior year period.timing of collecting receivables.
Investing Activities. Net cash used in investing activities was $121.5$11.9 million for the nine months ended September 30, 2017,Current Period, compared to $20.4$11.5 million for the nine months ended September 30, 2016.Prior Period. The $101.2$0.4 million increase in net cash used in investing activities was due primarily to a $17.5 million increase in purchases of property and equipment, a $1.1 million working capital settlement in the Current Period related to a prior year acquisition and a $1.0 million increase in investments partially offset by a $12.5 million increase in proceeds received from sales of property and equipment and $6.9 million in cash and restricted cash received in the Nuverra Acquisition.
Financing Activities. Net cash used in financing activities was $40.7 million for the Current Period compared to $2.4 million for the Prior Period. The $38.3 million increase in cash used in financing activities was due primarily to net cash used for acquisitionsdebt repayments of $62.2$18.8 million, and by higher capital expendituresan $18.5 million increase in repurchases of shares of Class A Common Stock during the nine months ended September 30, 2017 of $37.4 million asCurrent Period compared to the nine months ended September 30, 2016.
Financing Activities. Net cash provided by financing activities was $128.1 million for the nine months ended September 30, 2017, compared to cash provided by financing activities of $2.7 million for the nine months ended September 30, 2016. The $125.4 million increase in net cash provided by financing activities was primarily due to $128.5Prior Period and $2.1 million in net proceeds received from thedebt issuance of sharescosts in the IPO, including exercise of the over-allotment option.Current Period.
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Sustainability-Linked Credit Facility
On May 3, 2011, weMarch 17, 2022 (the “Restatement Date”), SES Holdings, a subsidiary of the Company, and Select Energy Services, LLC (“Select LLC”), a wholly-owned subsidiary of SES Holdings, entered into oura $270.0 million amended and restated senior secured sustainability-linked revolving credit facility (the “Sustainability-Linked Credit Facility, which wasFacility”), by and among SES Holdings, as parent, Select LLC, as borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”) (which amended most recently on June 13, 2017. As of September 30, 2017,and restated the total commitment under ourPrior Credit Facility was $100.0 million in the form of a revolver. As of September 30, 2017, we had no drawn borrowings under this bank facility. However, our available borrowings are reduced by letters of credit of $14.1 million.Agreement dated November 1, 2017). The revolverSustainability-Linked Credit Facility also has a sublimit of $20.0$40.0 million for letters of credit and a sublimit of $5.0$27.0 million for swing-lineswingline loans. The most recent amendment of our Credit Facility wasSubject to removeobtaining commitments from existing or new lenders, Select LLC has the requirement that businesses or assets acquired by us meet a positive EBITDA test (the “Positive EBITDA Test”) in orderoption to be a Permitted Acquisition (as defined in andincrease the maximum amount under the Credit Facility), as well assenior secured credit facility by $135.0 million during the first three years following the Restatement Date.
Refer to waive any defaults resulting from the DAWS Acquisition not being in compliance with the Positive EBITDA Test.
Our Credit Facility contains certain financial covenants, including (i) the maintenance of an Interest Coverage Ratio (as defined in the Credit Facility) of not less than (a) 1.25 to 1.0“Note 8—Debt” for the quarter ending on March 31, 2017, (b) 1.50 to 1.0 for the quarter ending on June 30, 2017, (c) 2.50 to 1.0 for the quarter ending on September 30, 2017 and (d) 3.00 to 1.0 for each fiscal quarter ending on or after December 31, 2017 and (ii) the maintenance of a Leverage Ratio of not greater than (a) 4.00 to 1.0 for the quarter ending on September 30, 2017, (b) 3.50 to 1.0 for the quarter ending on December 31, 2017, (c) 3.25 to 1.0 for the quarters ending on March 31, 2018, June 30, 2018 and September 30, 2018, (d) 3.00 to 1.0 for the quarter ending December 31, 2018 and (e) 2.75 to 1.0 for each fiscal quarter ending on or after March 31, 2019.
Our scheduled maturity date is February 28, 2020 and the per annum interest rate on our loans is LIBOR plus an applicable margin that ranges between 3.00% and 4.50%, based on our Leverage Ratio. Our capacity to make capital expenditures is $35 million for the fiscal year ending December 31, 2017 and for each year thereafter is the greater of (i) $35 million or (ii) 50% of our EBITDA for the prior twelve months; but this restriction is not applicable for any quarter if our Leverage Ratio asfurther discussion of the end of the preceding fiscal quarter was less than 3.00 to 1.0. Our Leverage Ratio was less than 3.00 to 1.0 as of September 30, 2017. In addition, ourSustainability-Linked Credit Facility contains an anti-cash hoarding provision that restricts us from making any borrowing, if after giving effect to such borrowing, we would have in excess of $20 million in cash and cash equivalents at the end of the week such borrowing is made.
As of September 30, 2017, we were in compliance with all restrictive covenants under our Credit Facility.
Contractual Obligations
Our contractual obligations include, among other things, our Sustainability-Linked Credit Facility and operating leases. Refer to Note 7—Debt“Note 6—Leases” in our 2021 Form 10-K for operating lease obligations as of December 31, 2021 and “Note 8—Debt” in Part I, Item 1 of this Quarterly Report for an update to our contractual obligationsSustainability-Linked Credit Facility as of SeptemberJune 30, 2017.2022.
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Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our Final Prospectus filed on April 24, 2017.2021 Form 10-K.
Recent Accounting Pronouncements
For information regarding new accounting policies or updates to existing accounting policies as a resultNone.
Off-Balance-Sheet Arrangements
As of new accounting pronouncements, please refer to Note 2 - Significant Accounting Policies in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.
Off Balance Sheet Arrangements
Currently,June 30, 2022, we havehad no material off balance sheet arrangements, except for operating leases.off-balance-sheet arrangements. As such, we are not materially exposed to any material financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The demand, pricing and terms for oilfield services provided by us are largely dependent upon the level of drilling and completion activity forin the U.S. oil and gas industry. Industry conditions areThe level of drilling and completion activity is influenced by numerous factors over which we have no control, including, but not limited to: global health events, including the COVID-19 pandemic; the supply of and demand for oil and gas; the level of prices,war, economic sanctions and other constraints to global trade and economic growth; current price levels as well as expectations about future prices of oil and gas; the magnitude and timing of capital spending by our customers; the cost of exploring for, developing, producing and delivering oil and gas; the expected rates of declining currentextent to which our E&P customers choose to drill and complete new wells to offset decline from their existing wells; the extent to which our E&P customers choose to invest to grow production; the discovery ratesdiscoveries of new oil and gas reserves; available storage capacity and pipeline and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; environmental regulations; technical advances affectingin alternative forms of energy consumption;(e.g. wind and solar electricity, electric vehicles) that encourage substitution for or displacement of oil and gas consumption in end-use markets; the price and availability of alternative fuels; the ability of oil and gas producers to raise equity capital and debt financing; and merger and divestitureacquisition activity among oil and gas producers.consolidation in our industry, and other factors.
The levelAny combination of activitythese factors that results in the U.S. oil and gas industry is volatile. Expected trends in oil and gas production activities may not continue and demand for our services may not reflect the level of activity in the industry. Any prolonged substantial reduction insustained low oil and gas prices would likely affect oil and gas production levels and, therefore, affect demand forlower capital spending and / or reduced drilling and completion activity by our services. A material decline in oil and gas prices or U.S. activity levels couldcustomers, would likely have a material adverse effect on our business, financial condition, results of operations and cash flows.
Interest Rate Risk
At SeptemberAs of June 30, 2017,2022, we had no outstanding debtborrowings under our Sustainability-Linked Credit Facility. As of August 1, 2022, we had no outstanding borrowings and approximately $206.9 million of available borrowing capacity under our Sustainability-Linked Credit Facility. Interest is calculated under the terms of our Sustainability-Linked Credit Facility based on our selection, from time to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. Assuming our indebtedness remained constant throughout the period, there would not be an impact on interest expense as a result of a 1% increase or decrease in the interest rate on this amount of debt for the nine months ended September 30, 2017. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
Foreign Currency Exchange Risk
We have been exposed to fluctuations between the U.S. dollar and the Canadian dollar with regard to the activities of our former Canadian subsidiary, which had designated the Canadian dollar as its functional currency. With the divestitures of our Canadian operations, we anticipate minimal future exposure to foreign currency exchange risk.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a‑15(b)13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d‑15(e)15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of SeptemberJune 30, 2017.2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended SeptemberJune 30, 20172022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
We are not currently a party to any legal proceedings that, if determined adversely against us, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows. We are, however, named defendants in certain lawsuits, investigations and claims arising in the ordinary course of conducting our business, including certain environmental claims and employee-related matters, and we expect that we will be named defendants in similar lawsuits, investigations and claims in the future. While the outcome of these lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. We have not assumed any liabilities arising out of these existing lawsuits, investigations and claims.
The following risk factors update the risk factors described under “Risk Factors” in the Final Prospectus. Except as set forth below, thereThere have been no material changes to the Risk Factors disclosed in the Final Prospectus.2021 Form 10-K.
The Merger may not be beneficial to us.
The consummation of the Merger involves potential risks, including, without limitation, the failure to realize expected profitability, growth or accretion; the incurrence of liabilities or other compliance costs related to environmental or regulatory matters, including potential liabilities that may be imposed without regard to fault or the legality of conduct; and the incurrence of unanticipated liabilities and costs for which indemnification is unavailable or inadequate. If these risks or other unanticipated liabilities were to materialize, any desired benefits of the Merger may not be fully realized, if at all, and our future financial performance and results of operations could be negatively impacted.
Failure to successfully combine our business with the business from Rockwater may adversely affect our future results.
The consummation of the Merger involves potential risks, including:
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If these risks or other anticipated or unanticipated liabilities were to materialize, any desired benefits of the Merger may not be fully realized, if at all, and our future business operations and our cash available for distribution could be negatively impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
On September 15, 2017, we issued 156,909 shares of Select Class A Common Stock, valued at $15.17 per share, to Resource Water Transfer, L.P. as partial consideration for the Resource Water Acquisition. This issuance of Select Class A Common Stock did not involve any underwriters, underwriting discounts or commissions or a public offering, and such issuance was exempt from registration requirements pursuant to Section 4(a)(2) of the Securities Act.
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Proceeds
Issuer Purchases of Equity Securities
NeitherDuring the Current Quarter, we nor any affiliated purchaser repurchased anythe shares of Class A Common Stock as shown in the table below. The shares were repurchased tosatisfy tax withholding obligations related to restricted stock previously awarded to certain of our equity securities during the period covered by this Quarterly Report on Form 10‑Q.current and former employees.
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| | Total Number of | | Weighted-Average Price | |
Period |
| Shares Purchased |
| Paid Per Share | |
April 1, 2022 to April 30, 2022 | | — | | $ | — |
May 1, 2022 to May 31, 2022 | | 94,595 | | $ | 8.32 |
June 1, 2022 to June 30, 2022 | | — | | $ | — |
Total | | 94,595 | | $ | 8.32 |
Item 3. Defaults Upon Senior Securities.Securities
None.
Item 4. Mine Safety Disclosures.Disclosures
Not applicable.
Item 5. Other Information.Information
None.
The following exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference, as applicable, as part of this report, and such Exhibit Index is incorporated herein by reference.report.
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*101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flow, and (vi) Notes to Consolidated Financial Statements. |
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104 | | Cover Page Interactive Data |
*Filed herewith
**Furnished herewith
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| SELECT ENERGY SERVICES, INC. | |
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Date: | By: | /s/ |
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| | Chairman, President and Chief Executive Officer |
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Date: | By: | /s/ |
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| | Senior Vice President and Chief Financial Officer
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